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To Earth And Below? Avici's Ticker Descent

When it launched in late July, the initial public offering of high-speed router maker Avici Systems looked like a throwback to last year's red-hot Internet IPO market.

A challenger to Cisco Systems , Juniper Networks and Lucent Technologies in the booming high-end Internet router market, Avici soared 212% on its opening day of trading on July 28 to close at $96.75.

Seven days later, shares of AVCI closed at $163.50, giving any investor lucky enough to get shares at the $31 offer price a 427% profit. Not a bad week's work.

Since Aug. 3, however, AVCI has experienced a choppy but rapid descent from the IPO heavens. Shares are down 39% this month alone, and at Wednesday morning's price of $100.13 (and falling), Avici is threatening for the first time to dip below its debut closing price.

That Avici's IPO has been one of the top-performing Internet offerings of the year - its first-day performance ranks No. 11 out of 114 total should be no surprise; even as other 'Net sectors suffer, infrastructure plays continue to attract investors. Juniper, for example, is by far this year's leading Internet stock, with a YTD gain of 235%.

Even better for Avici, the company's terabit switch router is designed to connect fiber-optic networks, one of the high-tech market's most popular sectors on Wall Street.

So too it should not surprise that Avici's stock has plummeted in recent weeks, for widening losses, a sudden outbreak of perspective among investors and a surprising hedge by the company's underwriter have brought shares back to Earth.

In early August the company reported Q2 losses of $26 million, or $5.11 per share, up from $10.4 million, or $3.24 per share, in the year-ago quarter. Accumulated losses through June 30 total $126.3 million.

August's Q2 report also served to remind investors that Avici has virtually no operating history. Founded in 1996, the company didn't even begin generating revenue until this year. Through two quarters, sales have totaled $2.7 million, all from Avici's one and only product. (This is a company that had a market capitalization of $7.2 billion at the beginning of September.)

And given its miniscule market share, heavier losses can be expected before things turn around, especially since Avici is trying to crack a sector dominated by networking behemoths. With only 1% of the North American switch and router market, Avici is a long way from holding its own against Cisco (48% share), Lucent (27%) or even Juniper (9%, but fast-growing). Avici also trails Marconi (8%) and Nortel (7%).

What this all adds up to is an overvalued stock, something even Avici's underwriter, Lehman Brothers, acknowledged on Aug. 22 when it started coverage of the company with a "neutral" rating, a virtually unprecedented move in a market where underwriters usually act as shills.

In his report, Lehman analyst Mark Sue wrote, "While we are enthusiastic about Avici's prospects, we believe current share price levels may already reflect the impressive and open ended nature of the company's market opportunity."

With the router market expected to grow from $2.1 billion this year to $15.8 billion by 2003 (according to telco market research firm RHK), Avici's market opportunity is great indeed. Lately, though, it appears investors are focusing less on Avici's future and more on its sobering present. Until Avici can increase revenues and market share while controlling or decreasing losses, expect further downward movement from its stock.