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Running with the bulls in telecom land

By Om Malik

Investors stocking up on telecom and networking stocks deserve to loose their shirts on their investments. Ignoring the telecom market fundamentals, over past six months, these so called professionals have plowed billions into this ÏleperÓ stocks, resulting in Ïbubble-eraÓ styled gains.

Here is a little sampling: AT&T (T) is up 57 percent; Extreme Networks (EXTR) and Juniper Networks (JNPR) are up nearly 40 percent this year; And Foundry Networks (FDRY) has surged 75 percent. The American Stock ExchangeÌs Networking Index (NWX) is up 32 percent, while the Dow Jones Telecom Index (DJATEL) is up 10%. Cisco, trading at 25 times earnings estimates for calendar year 2003 while Foundry is trading at 28 times 2004 earnings estimates and lets not even talk about Juniper is trading at 85 times 2003 earnings estimates. Extreme is not expected to make money this or next year.

Given that the four baby bells, Verizon, SBC, Qwest and BellSouth are flat to down this year, and have indicated time and again that they are unlikely to buy lot of equipment this or next year, this bullishness is hardly justified. With the exception of Qwest, the three Baby Bells are the only buyers of equipment in a market chock-full of equipment makers.

The new age carriers, those morons, which caused a bandwidth glut and prompted a telecom meltdown, are still struggling to make money. The bandwidth prices are still swooning, and even money making services like voice are seeing serious price erosion. In short, too many carriers, and too few customers. Despite all the hoopla about the telecom bubble burst, nothing really has changed. Except names Ò Williams Communications is WilTel. Oh please! Every single telecomÌs marketing mantra: ÏMy bandwidth is cheaper than yours.Ó

And now we hear that soon MCI, the new name for *WorldCon* is going to be coming out of bankruptcy. Free of debt, it can go about its merry ways and start under cutting competitors. That cannot be good for MCI or Verizon or SBC. In short, expect another round of bankruptcies.

MCI might as well stand for Massive Communication Insurgency.

Against such a backdrop, why even bother with telecom and networking stocks. I donÌt get it. And for those who do not learn from history, should loose their shirts in stock market.