No Such Thing As The Next Sure Thing

In their constant search for The Next Big Thing, investors, analysts and the
media in recent months have moved beyond B2B and Linux and settled on fiber
optics as an up-and-comer.

For good reason. The technology, which enables the transmission of data via
light waves, promises to dramatically increase the speed and bandwidth
capacity of data networks worldwide.

Too often, though, investors often treat The Next Big Thing as The Next Sure
Thing, laying down bets on any ticker that moves in a particular sector,
despite knowing that the number of losers will far outnumber winners.

That’s why the IPOs of Avici
Systems
, which makes terabit routers for optical networks,
and Corvis , which sells a
range of optical networking equipment, were so enthusiastically received
late last month.

Avici more than tripled from its offer price of $31 per share to close at
$96.75 in its July 28 debut. Corvis, which makes a range of equipment for
optical networks, opened the same day, gaining 135% to finish trading at
$84.72.

The aftermarket, however, may be less generous. After climbing in price for
four straight sessions, AVCI dropped from a high of $174.50 last Friday to
close at $125.68 Tuesday, a 28% plunge. (Shares had rebounded to $144 by
early Wednesday afternoon.)

Corvis, meanwhile, reached a high of $114.75 on Monday before sinking to
close at $95.69 on Tuesday, a 17% skid in less than two days.

As the IPO euphoria wears off, investors are focusing on the sobering
reality that neither of these companies has any operating history to speak
of. Corvis had no revenues through Q1, while Avici just announced Q2
revenues of $2.2 million and a net loss of $26 million.

And it’s not just new optical networking stocks that are vulnerable to
sudden drops. Northeast Optic Network
, which leases capacity to telcos, ISPs and other carriers, has
fallen 74% through Tuesday since peaking at $159 per share on Feb. 8.

Northeast, which Wednesday announced the
resignation
of chairman and CEO Vincent Bisceglia, on July 28 reported a
net loss of $9.1 million for the second quarter and $17.4 million for the
first half, up from $6.9 million and $12.2 million in the comparable
year-ago periods. Shares are down 16% since those Q2 numbers were made
public.

Bottom line: Stocks and sectors driven more by hype and hope rather than
earnings will always be vulnerable to violent price fluctuations. And that’s
where the fiber-optics market is right now.

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