JDS Uniphase (JDSU) is poised to continue its resurgence in the coming year as its optical gear is needed to meet heavy demand for overburdened metropolitan fiber networks and the cost-effective management of regional network traffic.
Click on graphic to enlarge:
Click to enlarge
The Silicon Valley company's optical equipment sales are projected to rise by 25 percent in the fiscal year ending June, 2011. As a result, JDSU stock has climbed about 77 percent this year, far outpacing the performance of the Nasdaq exchange, which rose some 17 percent.
The fiber optic lines that connect city office buildings, data centers and cellular towers, known as metro fiber, are congested, reports the Wall Street Journal.
"There's a shortage of metro fiber, and the demand is just going through the roof," said Rob Shanahan, chief executive of Lightower Fiber Networks. "The past couple of years, we have seen demand accelerate like I have never seen in the 20 years I've been in the industry," he noted.
Lightower Fiber Networks, which has acquired five companies since 2008, serves the Northeast part of country shown in the graphic above.
Telcos and telcom gear vendors, such as Cisco (NASDAQ:CSCO), China's Huawei and Alcatel-Lucent (NYSE:ALU), make up 70 percent of the demand for optical equipment. Internet companies such as Facebook, Google (NASDAQ:GOOG) and eBay (NASDAQ:EBAY) also buy optical gear to support their expanding data centers.
"It's usually cheaper to upgrade the capacity of existing fiber with new equipment than it is to lay new fiber," notes Lee Ratliff, an analyst with iSuppli.
Large telcos, especially in North America, are deploying reconfigurable optical add/drop multiplexers (ROADM), which help to contain costs as they reduce the amount of fiber needed for their networks. The emerging markets for ROADMs is the fastest growing segment of the optical equipment market, outpacing the larger, $2.5 billion transceiver market, according to Ovum.
JDSU is the leading maker of ROADMs, according to Infonetics Research.
Due to the demand for cost effectiveness, JDSU is designing next generation ROADMs that will be more fully automated. "ROADMs are widely deployed in metro and long-haul networks globally," says Sterling Perrin, an analyst with Heavy Reading. "But what's been deployed so far has limited flexibility."
Carriers want an optical meshed switching layer that does more of the costly electrical layer's functions. "I've talked to several operators, and they're gung-ho on making the optical layer more flexible," says Perrin. "It will never do all the electrical layer's functions, but the [more bits it can transport] the less expensive it is to transport those bits. That's the fundamental driver," he points out.
JDSU has another new lucrative source of revenue. The company supplies two key components of Microsoft's (NASDAQ:MSFT) popular Kinect gaming system.
Click to enlarge PrimeSense, a developer of gesture recognition technology, uses JDSU optical components. The gesture recognition platform, initially designed for next generation gaming and home entertainment systems, will eventually make it possible to replace remote controls with body movements.
Click here to watch JDSU gesture recognition demos.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.