Forum Archive Index - December 2000

[Gerry Tyler-Smith <g.tylersmith@ext.canterbury.ac.nz>]

Great article, Ben. Do we Sharechatters thank you enough for all the hard
work you do daily, on our behalf?


>As I write the Nasdaq is down 6% and the Dow is down 2% - it's definitly not
>a good day on the US markets - lets hope that the NZSE can continue to
>resist (on the whole) following Wall Street's drops...
>
>This article showed up in my inbox this morning from the ever reliable Red
>Herring magazine - check it out - it certainly makes for an interesting
>read.
>
>Best Regards
>
>Benjamin Dutton
>
>
>PERSONAL CAPITAL: PERSONAL CAPITAL: Capital at risk
>
>It's not a pleasant time in the market... or is it?
>
>If you're looking to turn a quick buck as a day-trader, it's
>a terrible time in the market (unless you're adept at
>selling stocks short). But for a real, long-term technology
>investor, things are getting interesting.
>
>Remember back in the early 1990s, when not every investor
>was a technology investor? Back then you could pick up Cisco
>Systems (Nasdaq: CSCO) with a price-to-earnings ratio of 30.
>Well, it would be nice to see such values again -- and the
>more the bubble deflates, the closer we get.
>
>This year's massive, painful, and volatile correction in
>many young technology companies is a by-product of Wall
>Street's rush to take companies public. The massive assembly
>line of IPOs churned out over the last two years flooded the
>market with young, inexperienced, and unprofitable
>companies, and a lot of inexperienced investors gobbled them
>up. Many of these companies were completely incompetent or
>had terrible business models. Others were simply not ready
>for the public markets.
>
>This column was started on the premise that the market was
>turning into a risky public venture market. That type of
>environment demands a closer, more analytical look at
>specific vertical technology fields. As clumps of technology
>companies in specific markets go public earlier in their
>life cycle, investing gets more risky, but the potential for
>huge returns is also still there.
>
>THE PUBLIC VC MARKET
>Years ago, an emerging market would have dozens of players
>funded by the venture community. These companies would fight
>tooth and nail for market share and profitability -- in the
>private market. Then, after several years of creative
>destruction in the market, Wall Street would consider taking
>them public.
>
>In the last two years, we saw an elimination of the later
>stages of the IPO process. Wall Street stripped out the
>requirement for profitability -- or in many cases, even the
>requirement for revenue -- and took the companies straight
>to the market. You had dozens of companies going public in
>the same market, with no prior weeding out in the private
>market.
>
>In my mind, this all culminated in July of this year, when
>Corvis (Nasdaq: CORV), a promising optical networking
>technology company founded by former Ciena (Nasdaq: CIEN)
>founder David Huber, went public without any revenues and
>certainly no promises of profit on the near horizon. The IPO
>was really a $1 billion venture capital round, funded out of
>the wallets of public investors, at a valuation that would
>make any real venture capitalist cringe. Wall Street quickly
>bid Corvis up to a $37 billion market cap within a week.
>
>Corvis's market cap is now $9 billion, as the stock has
>fallen more than 75 percent in just four months. This IPO,
>more than any others, is a symbol of the extremes tested by
>Wall Street. After the recent correction, the market has
>become more selective. Will we return to only taking
>profitable companies public? Probably not. But reckless and
>greedy IPOs with irrational valuations have been put on
>hold.
>
>In the venture market, risky and turbulent company life
>cycles are the norm -- a company, as it evolves, goes
>through fits and starts, customer wins and losses, and an
>evolution in management and culture. If the companies blow
>up, or need help, the VCs and other investors become
>involved. But such investors are accustomed to large amounts
>of risk, and they build portfolios that are hedged against
>such risk with a "one in ten" philosophy of funding enough
>companies to hit at least one grand slam out of every ten
>investments. The average investor cannot afford to assume
>that much risk.
>
>------------------------------------------------------------
>               A D V E R T I S E M E N T
>
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>
>              A D V E R T I S E M E N T
>------------------------------------------------------------
>
>WHAT NOW?
>In the first leg of the correction in April, we adjusted our
>attitude toward this new wild-west public market with the
>new new rules. One of the rules was that an unprofitable
>company (and certainly one without revenues) should never be
>valued over $10 billion. Another was that if an investor is
>not able to diversify the portfolio and play several
>companies in the same technology spaces, you're better off
>sticking with bonds or mutual funds.
>
>What you have seen in the market this year is the negative
>aspect of that risk -- young, fast-growing but inexperienced
>companies can collapse back to earth just as fast as they
>sailed into orbit -- all it takes is one sticky quarter.
>Take Cacheflow (Nasdaq: CFLO), one of the companies I've
>written about, as a recent example. Its quarter was deemed a
>disappointment. A rocket ship up, and a lead balloon down.
>Surprising? Not really. Painful? Sometimes. But necessary
>for the evolution of emerging markets. The company still has
>the same potential, but Wall Street's hacked it down for its
>short-term bobble.
>
>So, what now? Largely, what we are seeing now is an across-
>the-board valuation reality check. When Wall Street gets
>gloomy, it dwells on risk and becomes increasingly
>pessimistic. Remember that the market is very shortsighted.
>You should keep your eye on a two- to three-year time frame.
>
>Can the Nasdaq go to 2000? Possibly. Will it go to zero?
>Definitely not. The market should begin the healing process
>by the first quarter of next year. Of course, it would help
>the process along if the country avoided a civil war and
>picked a new president. And history says that the
>probability of the Nasdaq rising to new highs within the
>next five years is extremely high, barring a complete
>collapse of the U.S. economy.
>
>FOLLOW THE LEADER
>Many of the companies closely followed by Personal Capital
>were picked because they were emerging as leaders in
>developing technology markets, and they were also leading
>hot trends. For example, BEA Systems (Nasdaq: BEAS) was
>gaining momentum in the componentized Web application space.
>Companies such as Extreme Networks (Nasdaq: EXTR), Sycamore
>Networks (Nasdaq: SCMR), Ciena, Juniper Networks (Nasdaq:
>JNPR), and Redback Networks (Nasdaq: RBAK) are leading the
>charge in next-generation networking gear.
>
>JDS Uniphase (Nasdaq: JDSU) and SDL (Nasdaq: SDLI) are
>gorillas in the optic components space, and their valuations
>are finally reaching attractive proportions. Micromuse
>(Nasdaq: MUSE) maintains its lead in the field of
>telecommunications network management.
>
>Another sector to watch is communications chip makers. Many
>of these companies, such as Xilinx (Nasdaq: XLNX) and
>Broadcom (Nasdaq: BRCM), were the first to get slaughtered
>in the correction, and they are thus likely to be the first
>to recover. Xilinx, which has seen its profits grow at a
>rate in excess of 80 percent and is now trading at a P/E
>ratio of 21, looks downright cheap.
>
>With the IPO pipeline shutting down, these companies I
>mentioned, most of which are already profitable, will get
>stronger as the upstarts will need more time to raise
>capital and catch up. That's why we should now get back to
>the basics of technology investing, and look for the
>profitable leaders in the public space to extend their
>leads.
>
>RECENT LIGHT READING NEWS STORIES
>
>* Patent points to Corvis secrets
>  http://www.lightreading.com/document.asp?doc_id=1586
>
>* Cyras: what, us worry?
>  http://www.lightreading.com/document.asp?doc_id=1616
>
>* Ciena spooks the market
>  http://www.lightreading.com/document.asp?doc_id=1603
>
>
>- R. Scott Raynovich
>  rayno@lightreading.com
>
>* R. Scott Raynovich, former investment editor of
>Redherring.com, is executive editor of Light Reading
>(http://www.lightreading.com), a global site for optical
>networking. He has covered technology markets for more than
>seven years. *
>
>------------------------------------------------------------
>
>RELATED LINKS
>* Personal Capital: The new new rules.
>  http://www.redherring.com/investor/2000/0406/inv-pc040600.html
>
>* What's Corvis's secret?
>http://www.redherring.com/investor/2000/0810/inv-pc081000.html
>
>* Fish or Cut Bait: Fiber-optic frenzy.
>  http://www.redherring.com/investor/2000/0731/inv-focb073100.html
>
>* Previous Personal Capital: Get ready for broadband.
>  http://www.redherring.com/investor/2000/1116/inv-pc111600.html
>
>------------------------------------------------------------
>
>Discuss today's column in the Personal Capital column discussion:
>http://boards.redherring.com/WebX?13@^2342@.ee6c58e
>
>or check out forums, video, and events at the Discussions
>home page:
>http://www.redherring.com/discussions/
>
>------------------------------------------------------------
>
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>------------------------------------------------------------
>
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>------------------------------------------------------------
>
>
>
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