The Optical Fiber Conference (OFC) runs next week in Los Angeles, and some Wall Street analysts are looking forward to some peppy activity among the optical networking names, including some possible merger discussions.
OFC always brings back mixed memories for me, first the OFC in Baltimore in 2000, which marked the bubble of all bubbles as optical companies with no revenues climbed to multibillion-dollar valuations. We can reminisce about those odd optical startup names like Xros. Check out this link.
A few years later, in 2003, I remember attending the newly merged NFOEC conference in Orlando, which was completely deserted — literally the most empty trade show I’ve ever attended. NFOEC eventually merged with OFC.
OFC is back to being a normal and fairly interesting tradeshow that includes executive-level meetings as well as detailed scientific paper presentations for what is still one of the most important enabling technlogies for networks: optical technology.
Michael Genovese, Managing Director at MKM Partners, is out with a good research note this morning summarizing what he hopes to see at OFC. Let’s highlight some of Genovese’s theories:
OFC “should be a positive event for stocks.” Genevese says the crush for traffic will provide strong fundamental demand, especially for 100G optical systems. The names to follow here include Infinera (Nasdaq: INFN), Ciena (Nasdaq: CIEN), ADVA (DE: ADV), and Alcatel-Lucent (NYSE: ALU). Demand from service providers, Web 2.0 data center operators, governments, and enterprises continues to drive the need for a 100G capacity expansion.
Optical components are not benefiting much. Conversely, Geneovese sees the optical components companies as not having benefited from the strength in the 100G market. He also says they may not benefit much from the growth of 100G metro. There is a need for consolidation in the market, says Genovese, with “too many players chasing the same optical transponder market opportunities.”
Consolidation in components companies is needed. Genovese points out that only industry consolidation will solve the struggles of the optical components vendors. Datacom players such as Finisar (Nasdaq: FNSR) are finding margins under significant pressure. JDSU plans to spin off its optical components business into a publicly traded company called Lumentum (LITE) during the third quarter. Still more deals are needed, and Genovese thinks a merger such as a deal between Finisar and Lumentum makes sense to help consolidate the industry.
Other components players that could be ripe for deals include Oclaro (Nasdaq: OCLR), NeoPhotonics (Nasdaq: NPTN), Emcore (Nasdaq: EMKR), and potentially Avago (Nasdaq: AVGO), according to Genovese.
I always look forward to mergers, they are fun, so let’s hope that Genovese’s ideas turn into some action. No, I don’t expect a blockbuster merger such as in 2000 — just a month after OFC — when JDS merged with Uniphase in a deal worth $41 billion that resulted in the current JDSU. But following Genovese’s analysis, it will be interesting if there’s any buzz about possible future combinations.
(Disclosure: The author owned AVGO stock at the time of writing. It’s in the Rayno Model Portfolio, which is up 19% YTD. He’s owned it for months, and is happy about that.)