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Telecom goes bust
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December 13, 2001: 5:57 p.m. ET
Warnings from Lucent, Ciena and Qwest could be just the beginning.
By Adam Lashinsky
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NEW YORK (CNN/Money) - The news couldn't be worse in the telecom-equipment sector. Qwest, Lucent and Ciena, all of which cut revenue expectations Thursday, are the latest to affirm that the hoped for recovery for teleco stocks was just that -- a hope. And yet, the semiconductor companies that sell into the sector continue to have valuations that assume all is well.
To be sure, the stocks of the communications-chip makers all took a big hit Thursday, crashing on the order of 15 percent -- names like Applied Micro Circuits, PMC-Sierra, Vitesse Semiconductor, Agere Systems and Marvell Technology Group all got hit.
But understand, the selloff puts back these stocks merely to early November levels, when the tech-stock recovery was in full lather.
Applied Micro Circuits, for example, which gets as much as 85 percent of its revenues from telecommunications-equipment makers, has only now fallen below its price on Nov. 8, when this column featured it as an overvalued stock. (Its shares closed that day at $12.05; Thursday they stopped plunging at $11.39.)
At the time, Applied Micro was worth about 22 times Wall Street's current fiscal year revenue estimates, an astronomical multiple for an unprofitable company. Today, at a market capitalization of $3.4 billion, the multiple is only slightly lower, at 21 times sales. And that's largely because neither the company nor its analysts have lowered expectations for the fiscal year that ends in March.
Some on Wall Street aren't fooled. Alex Guana, for example, a research analyst with UBS Warburg in San Francisco, recently began covering Applied Micro with a "hold." Guana noted that the anticipated recovery in communications markets was likely to disappoint bulls. "This disappointment should afford investors another opportunity to avail themselves of cycle-trough valuation levels," the analyst wrote. For what it's worth, Applied Micro last bottomed at $6.01 in early October.
But Applied Micro hardly is alone. The entire group has had a wild recovery since tech stocks skidded following Sept. 11. With each recovery, it's as if bears are forced to watch a bad movie over and over again.
"We've seen this how many times already this year -- three?" asks Daniel Niles, a semiconductor and PC analyst with Lehman Brothers in San Francisco. "A lot of these names could have 50 percent downside from here. Our big issue is, are the sequential declines (in revenue) over? I'd say no."
Hope springs eternal, of course. Brett Hodess, a semiconductor equipment analyst with Merrill Lynch, noted in a report to clients Thursday that the fresh layoff -- and, in some cases, temporary furlough -- of 1,700 workers at Applied Materials (AMAT: down $3.79 to $41.08, Research, Estimates) is fresh proof of a market bottom.
I don't get the logic. Applied Materials relies on purchases from chip makers, so one would think that management sees only bad news ahead if it's still slimming down. But Hodess believes the furlough was hotly debated by management. "We believe the controversy and furlough program are indicators that Applied wants to be able to call back its skilled workers quickly if demand begins to grow," says Hodess.
Well, that's the cup half full, at least.
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ONLY THE BEGINNING?
