News
Commentary
3/15/2002
03:29 PM
Commentary
Commentary
Commentary
Connect Directly
RSS
E-Mail
50%
50%

Taking Stock: Oversupply And Competition Keep Telecom Equipment Stocks Down

Shaky telecom buyers lack capital for equipment.

Investing in networking stocks has become like taking a ride on the Giant Dipper on the Santa Cruz Beach Boardwalk. The builder of the classic roller coaster envisioned that it would be a "combination earthquake, balloon ascension, and aeroplane drop." As a Californian, I'm always wary of earthquakes, but the more interesting questions is, when does the airplane stop descending?

Networking stocks were some of the hottest commodities during the tech bubble. At the peak, Cisco Systems was the world's largest company in terms of market capitalization, with Lucent Technologies and Nortel Networks not far behind. This, in turn, fed a whole component industry that drove up the valuations of semiconductor companies, such as AMCC, PMC Sierra, Triquint, and Vitesse, and optical component firms, such as Corning and JDS Uniphase, to unfathomable heights.

The massive build-out of telecommunications networks in the United States and Europe provided fuel for the bubble. Overbuilding eventually sent every company related to the telecom build-out into a tailspin. Though demand appears to have stopped declining, the return of growth remains elusive.

Demand for communication semiconductors, optical components, and telecom equipment doesn't occur in a vacuum. It's capital spending by telecommunications companies such as AT&T, Qwest Communications International, SBC Communications, Verizon, WorldCom and the like that drives demand.

As the bandwidth glut became apparent last year, these companies slashed capital expenditures in 2001 by 25% relative to the prior year. Anyone who has followed this industry knows that spending on telecom equipment is very cyclical, though the cycles are often so long that one almost forgets that.

For telecom equipment demand to return, demand for telecom services must return. Perhaps more important, the telecom carriers must have the financial wherewithal to increase spending.

While demand for voice and data services remains weak, local and long-distance services are facing increased competition from wireless. The wireless penetration rate is now around 46% in the United States and even higher in most of Europe, and mobile users are increasingly using their cell phones for local and long-distance calls. It's not helping that wireless providers are giving away more and more free minutes. However, growth in the number of wireless subscribers has dropped to a 12% to 14% rate this year from more than 25% in 2001. Any economic recovery, though, should increase demand for telecommunications services.

The prospects for a return to growth in the telecom equipment market aren't very rosy. A number of the telecom companies issued too much debt in the last couple of years. Qwest, for instance, now owes more than $24 billion. Its capacity to borrow more has been severely restricted.

Qwest isn't unique. Weakening fundamentals, debt downgrades, and several government inquiries into accounting at Qwest and WorldCom have increased the cost of borrowing or forced the companies to put up collateral to obtain the financing they want. To reduce the need for additional capital, spending on networks has been on the chopping block. This year, capital expenses may drop 20% or more.

Demand for wireless services was supposed to be a stronghold. But Nokia recently said that it forecasts weaker-than-expected sales of wireless telecom equipment, declining 25% year over year in the first quarter. Given Nokia's relatively strong position in the market, this doesn't bode well for the lesser competitors. Lucent, which has struggled with its own restructuring, lowered its forecast from 10% to 15% revenue growth to modest to 10% growth.

None of this points to an immediate turnaround in spending on telecom equipment or components. For now, I continue to wait patiently for that reassuring clicking sound as the Giant Dipper starts its ascent.

William Schaff is chief investment officer at Bay Isle Financial LLC, which manages the InformationWeek 100 Stock Index. Reach him at bschaff@bayisle.com.


To discuss this column with other readers, please visit William Schaff's forum on the Listening Post.

To find out more about William Schaff, please visit his page on the Listening Post.

Comment  | 
Print  | 
More Insights
IT's Reputation: What the Data Says
IT's Reputation: What the Data Says
InformationWeek's IT Perception Survey seeks to quantify how IT thinks it's doing versus how the business really views IT's performance in delivering services - and, more important, powering innovation. Our results suggest IT leaders should worry less about whether they're getting enough resources and more about the relationships they have with business unit peers.
Register for InformationWeek Newsletters
White Papers
Current Issue
InformationWeek Must Reads Oct. 21, 2014
InformationWeek's new Must Reads is a compendium of our best recent coverage of digital strategy. Learn why you should learn to embrace DevOps, how to avoid roadblocks for digital projects, what the five steps to API management are, and more.
Video
Slideshows
Twitter Feed
InformationWeek Radio
Archived InformationWeek Radio
A roundup of the top stories and trends on InformationWeek.com
Sponsored Live Streaming Video
Everything You've Been Told About Mobility Is Wrong
Attend this video symposium with Sean Wisdom, Global Director of Mobility Solutions, and learn about how you can harness powerful new products to mobilize your business potential.