We currently own no optical component equities whatsoever. I believe the industry environment is a hypercompetitive, oversupplied, commodity business. Until consolidation takes place, a company could be run by the Steve Jobs of Optical and still not make money. Financal and technical acumen are meaningless if the company is trying to live in a moonscape. In short, some extreme terraforming of the optical component environment needs to happen before I consider living there.
When I was at the Lightreading Conference last month, Scott Clavenna asked me if I thought the dark times were over for Telecom. My response was:
I think the recovery everyone is talking about is a reflection of their hopes and desires rather than reality.
Truth be told, I think the soft environment of the last few years is the new reality, and the last six months are not a trend you can lay a ruler down on and extrapolate to 2010. There will be sector exceptions (like GE-PON FTTH), but my perception that is people are taking the good news in a few isolated sectors and applying it across the board.
Bookham Inc (BKHM) is a good example of such sentiment. Investors enraged at Bookham’s recent performance should ask themselves some hard questions about why they bought the stock in the first place. If they bought the stock at 7, why don’t they think it’s a screaming buy at 4?
The facts of the optical component industry haven’t changed and investor behavior is still irrational. This sheds some light on the speculative nature of investing that still pervades the Telecom components sector- these investors will need to be burned at the stake by Mr. Market before they get sensible.
I haven’t done any financial, technical, or strategic work on Finisar Corp. (FNSR) but the emotions surrounding this stock reminds me of BKHM. This is the current favorite stock of the few remaining optical zealots who have yet to be beheaded.
The recent capitulation of Bookham, JDS Uniphase (JDSU), and Avanex Corp (AVNX) and the bloody climax of an Optical Reign of Terror worthy of Robespierre himself finally has me convinced that it’s time to start spending time investigating these equities. Eventually, someone, somewhere is going to make money selling optical modules. It’s time to figure who it will be, and what consolidation process will take place to allow this to happen.