At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.
And speaking of the best...
Are you ready for the 100G Revolution? For years, investors have been wondering which companies are best positioned to profit from the Internet's transition from 10-gigabyte Ethernet speeds to new networks capable of moving data at speeds four, or even 10, times as fast.
Would the best way to play this trend be Motley Fool favorite Infinera (NAS: INFN) and its Star Trek-sounding "photonic integration technology"? Or perhaps Alcatel-Lucent (NYS: ALU) , the former leading light of cutting-edge optical technology that last week announced an Internet core router capable of managing 160 separate 100-gigabit Ethernet ports simultaneously?
Actually, according to the analysts at Needham, the best play on 100G going today is neither of these companies, but a little optical networking equipment specialist based in the suburbs of Baltimore. Ciena (NAS: CIEN) is its name, and 100G is its game.
Could Ciena earn you some green?
Yesterday, Needham initiated coverage of Ciena with a buy rating and a $16 price target (the stock's about $12 today), arguing that in the race to 100G, Ciena's position is quite simply "dominant." The company's got a "robust order pipeline" and the potential to grab 85% of U.S. equipment orders in the switch to 100G.
While the company has endured a tough couple of years since the economy took a downward turn, Needham notes that things are starting to look up for Ciena. "Improving margins should deliver value even against the rough conditions in the economy and broader tech market."
If only that were true.
Or will Ciena get burnt again?
The truth is that while Ciena did show a modest improvement (140 basis points) last quarter, in comparison to the previous year's first-quarter gross margins, the improvement so far is more of a blip and less of a trend. Sequentially, gross margins dropped for the second time in a row. And on a trailing-12-month basis, Ciena is still grossing fewer than $0.42 of profit from each revenue dollar -- and losing money on both an operating and a net basis.
That's actually better than what we saw at Alcatel-Lucent and Infinera, mind you, where gross margins dropped both sequentially and year over year. And of course, all three of these 100G wunderkinder are burning cash like mad. (Although Alcatel did post a free-cash-flow positive quarter last year, and Ciena is two-for-two in this regard over the past two quarters.)
Foolish final thought
The truth is that right now, it's still hard to say which, if any, of these three companies is going to win the race to 100G and prove a winner as part of the mobile revolution. Judging from the numbers as we see them today, it looks more likely that they'll all spend themselves into the ground trying to win the race and selling their products at a loss, so that the only real winners here will be the most boring members of the telecom industry: Verizon (NYS: VZ) and AT&T (NYS: T) .
These two, at least, can be depended upon to put 100G networks to good use once they get here, ferrying data traffic hither and yon. And with roughly $15 billion in annual free cash flow each, Verizon and AT&T can be counted on to be around -- and solvent -- to profit for a long time.
At the time thisarticle was published Fool contributorRich Smithdoes not own shares of, or short, any company named above. You can find him on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 339 out of more than 180,000 members. The Motley Foolhas adisclosure policy.The Motley Fool owns shares of Infinera.Motley Fool newsletter serviceshave recommended buying shares of Infinera.We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors.
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