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Internet 2001: After The Fall

It may not have felt like it - and still doesn't - but the stock meltdown and cash burnout that scorched the Web world this year was the best thing that could have happened to the Internet economy.

With no bubble left to cover balance-sheet weaknesses or forgive flawed strategies, dozens of dot.com businesses were exposed as little more than money pits and pipe dreams.

For investors, the rapid, ongoing removal of 'Net detritus and bottom-feeders - painful and messy as it has been - provides an opportunity for clarity and uncluttered perspective.

From now until the end of the year, The Morning Report will go around the horn to discuss each of the 13 Internet sectors and which members bear watching in 2001. These won't be stock "picks," per se, though I will tend to focus on the stronger 'Net players. Rather, we'll look briefly at what to expect in the coming year from most of the major companies in each group. (However, should any of those cited emerge as big gainers over the ensuing 12 months, I will retroactively claim credit for picking them.)

We'll start today by exploring Speed/Bandwidth, a classic infrastructure sector. Wednesday will be Wireless day, while the E-commerce Enablers sector will be Thursday's focus. On Friday, the Internet Services sector will be in the spotlight.

Speed/Bandwidth

To some investors, this sector begins and ends with networking giant Cisco Systems , whose quarterly revenue ($6.7 billion) alone exceeds the market capitalization of all but 17 other Internet companies.

But the Speed/Bandwidth group also includes three other firms that are among the 11 largest 'Net players in terms of market cap: router maker and Cisco competitor Juniper Networks ($41 billion), high-speed chipmaker Broadcom ($29 billion) and fiber-optic switch vendor Sycamore Networks ($15 billion). All of which are dwarfed by CSCO's monster $347 billion cap.

For much of this year, analysts have expressed concerns that Cisco's revenue growth will slow as a) Juniper and other companies eat away at its market share and b) demand for networking equipment softens due to customers' large inventories and shrinking wallets. And each quarter, Cisco responded by beating revenue estimates and increasing its growth rate.

Now, however, it appears that even Cisco sees warning clouds. In the quarter ended Oct. 28, Cisco more than tripled the amount of money it allocates to cover potential non-payments from its customers, many of which are hitting hard times. While that $275 million (up from $75 million last year) is only 4% of the company's recent quarterly sales, the news sent CSCO shares down 11% on heavy volume Monday.

There may indeed be weaker demand for infrastructure hardware in 2001, but it hardly will imperil Cisco in the short-term. Sure, the 800-pound gorilla may temporarily shrink to 790 pounds, but long-term, look for more solid revenues and healthy earnings.

Juniper Networks

Unless, of course, Juniper Networks continues to eat into Cisco's lead in the high-end router market. Through June, JNPR increased its market share to 22% from 17% in March, while Cisco's slipped to 75% from 80%.

With rave reviews from customers, and impressive profit growth (17 cents per share in Q3, up from 6 cents per share in the second quarter), Juniper has been one of the few high-flyers this year among 'Net stocks. Shares closed Monday at $128.88, up 127% since Dec. 31. Only three other Internet companies have seen their shares post triple-digit advances for the year to date.

Gravity, however, already has begun catching up with Juniper. Since closing at $243 on Oct. 16, JNPR's share price has dropped 47% through Monday. Yet this still leaves the company valued at 92x trailing 12 months' revenue of $443 million.

The coming year will see more outstanding quarters from Juniper. But no other Internet compani



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