NEW YORK (CNNfn) - Stocks in the highflying optical networking sector made a dramatic recovery in the last two hours of trading Thursday, after being trampled earlier in the day.
Optical networking stocks plunged Wednesday after Nortel Networks Corp.'s third-quarter revenue fell short of analysts' expectations. The sell-off within that sector spread to other technology shares Wednesday, causing the tech-heavy Nasdaq composite index to close down 190.22 points, or 5.6 percent, that day.
Optical stocks extended their losses Thursday morning and suddenly reversed direction late in the afternoon, as investors mustered the courage to step back into the volatile sector. The tech-heavy Nasdaq finished the day up 42.59 at 3,272.16, a 1.3 percent gain.
Optical networking, which is the transmission of data using photons of light carried over optical fibers instead of electrons carried over copper wires, has been one of the hottest sectors in the market over the past year, with many stocks in that area more than quadrupling over the past 52 weeks.
While Nortel's (NT: Research, Estimates) optical revenue increased 90 percent from last year, it declined slightly from the second quarter. The company attributed the slowing optical revenue to excessive inventory buildup at telephone companies that were being worked off. That news was enough to knock $55 billion from Nortel's U.S. market value Wednesday, and tens of billions of dollars from other stocks in the sector.
"We are finally starting to come to those stocks that haven't given up ground yet," Charles Pradilla, chief market strategist at SG Cowen, said of fiber optic stocks. "This is the first time that these stocks that are priced for perfection have shown some imperfections."
Nortel stabilized Thursday, adding 50 cents to $45.38. Lucent (LU: Research, Estimates), which already was down about 76 percent from its 52-week high, partly because the company was late in entering the optical market, gained 94 cents to close at $21.06.
Corning (GLW: Research, Estimates), which makes fiber optic cable, lost $6.88 to $70, but it had been down as much as 17 points during the day. SDL (SDLI: Research, Estimates) gained $6.38 to close at $240.56, although it was down a staggering 46 points at one point in the session. JDS Uniphase (JDSU: Research, Estimates), which has agreed to merge with SDL in a stock swap, gained $3.44 to $74.44
Optical components maker SDL has been as high as $460.50 and as low as $37.56 over the past 52 weeks. Even at the reduced price of $240, SDL stock is selling for almost 500 times what analysts expect the company to earn this year, a stratospheric multiple by traditional standards, even for a fast-growing company.
JDS Uniphase reports
Tech stock traders looked towards JDS Uniphase's earnings report after the close for guidance about the health of the optical sector. Two of JDS Uniphase's largest customers, Lucent and Nortel, have reported disappointing quarters in their optical businesses. Lucent represented approximately 20 percent of JDS Uniphase's revenue last quarter and Nortel was just under 20 percent, according to Merrill Lynch analyst Tom Astle.
After the closing bell, JDS Uniphase, the world's largest supplier of components for fiber optic networks, reported a fiscal first-quarter profit that topped expectations on stronger-than-expected revenue. Its report could boost fiber optic shares on Friday. The company said it earned $177 million, or 18 cents per share, excluding special charges. That compares with 8 cents per share during the same period last year and 2 cents better than the mean of analysts' estimates. Revenue for the quarter was $786 million, up from $290 million during the same period last year, and about $30 million above analysts' estimates.
Semiconductors recover too
Companies that make semiconductors used in optical networks also recovered Thursday after being pounded on Wednesday, although some still finished in negative territory.
PMC-Sierra (PMCS: Research, Estimates), which makes chips used in broadband communications infrastructures and high-bandwidth networks, gained $10.56 to $171.69, having been down $14.50 earlier in the day. Applied Micro Circuits (AMCC: Research, Estimates), a chip company in the same area, lost $9.50 to $138.50. Broadcom (BRCM: Research, Estimates), the leading maker of chips for broadband digital transmission of voice, video and data, lost $3.75 to $214.12, having been down $32.50 earlier in the session.
SG Cowen analyst Drew Peck downgraded Applied Micro Circuits to "buy" Wednesday in response to the Nortel announcement, contributing to a 50-point decline in the stock that day.
"While the company has seen no negative trend in its bookings activity, the Nortel remarks suggest a downturn is inevitable, although probably not until the first quarter of 2001," Peck wrote in a research note. "Unfortunately, stocks selling at more than 100 times multiples don't fare well in the face of any negative trend."
VeriSign dips
VeriSign shares slipped Thursday, even though the company reported after Wednesday's close a third-quarter operating profit that was three times what Wall Street had expected. Its stock closed down $5.12 at $142.31, although it hit a low of $120 during the session. For the period ended Sept. 30, VeriSign (VRSN: Research, Estimates) said it earned $38.4 million, or 18 cents per share, excluding one-time items. That compares with net income of $1.6 million, or 1 cent per share, during the same period last year, and was triple the mean of analysts' estimates, according to earnings tracker First Call. VeriSign, which provides data-authentication, secure-payment and domain-name registration services for Web sites, said its revenue for the quarter was $173.1 million. That's up 660 percent from the year-ago period but includes revenue from Network Solutions, which VeriSign acquired on June 8.
Virata, Clarus plunge
Virata (VRTA: Research, Estimates) and Clarus (CLRS: Research, Estimates) were the two top percentage losers on Nasdaq.
Shares in Virata Corp. closed down $16.06 at $16.81, a 49 percent drop, after the telecommunications equipment maker told analysts it faced slowing sales to a major customer. The company makes semiconductors used in Digital Subscriber Line equipment.
Virata executives told analysts in a conference call on Wednesday night that it "would have trouble at one of its larger customers," said Alex Gauna, a Banc of America analyst. UBS Warburg downgraded Virata's stock to a "buy" Thursday, citing a possible inventory buildup problem in the March quarter.
Clarus Corp., a provider of Web-based procurement software and services, dropped $8.81 to $11.06, a 44 percent loss, after the company posted a third-quarter loss that was much steeper than analysts had expected. Three brokerage firms downgraded the company's stock in response to the earnings report.
--Reuters contributed to this story 
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