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Telco Tech Companies Feeling the Pain


'08 revenue and earnings estimates have changed over the last year for some telco tech names.

The telco tech names are in free fall. I have been fairly cavalier about it because I've stuck with owning puts to protect against being wrong on my view of the sector, but at some point I need to decide whether I am in fact wrong. The way I see it, there are usually two reasons why stocks get hit as hard as Ciena (CIEN), F5 Networks (FFIV), Infinera (INFN) and Riverbed (RVBD) have suffered: Either someone has figured out that published estimates and/or guidance are no longer good; and/or the multiples are getting downshifted.

Looking at which company is at the greatest risk for multiple compression, RVBD and INFN jump out. At current prices (not where I unfortunately got into INFN) RVBD carries a 36 P/E and INFN a 52 P/E. We can argue over what the long term growth rates for each are likely to be, but on '08 growth estimates of 18% and 69% respectively, RVBD is flat out expensive and INFN may look reasonable on a PEG basis, but has zero room for the "G" in the PEG to miss. I view CIEN's multiple here as reasonable-to-a-bit-cheap, and FFIV's as quite inexpensive, so the risk of multiple compression for the latter should be limited.

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Now to the issue of whether there are EPS misses in the offing. Below are charts showing how '08 revenue and earnings estimates for each company have changed over the last year, and my take on what it means.

Ciena EPS

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Ciena Revenues

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Very little movement in estimates; the current slide began when the company –in its last conference call - sounded less enthusiastic about margin and EPS growth than the analysts expected it to be. Given its current multiple I believe it has sharp snap back potential (to the mid $40's) and modest risk of further meaningful declines, even if the company were to disappoint by a little bit: bottom line, $6 down / $15 up.

F5 Networks EPS

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F5 Networks Revenues

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The margin damage caused by its recent acquisition, and by the fear of its exposure to the financial sector is obvious in the drastic fall in EPS estimates. Revenues estimates have hung in there. This is as cheap as this stock has been in a long long time. I think the risk of its exposure to the financials is reasonable, but more than priced in. Any good news on margins could snap this one really hard: $4 down / $15 up.

Riverbed EPS

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Riverbed Revenues

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Not much to justify the price plunge in these charts but the stock does have some exposure to the financial sector. If it disappoints, there is plenty of multiple to compress here: $7 down / $7 up.

Infinera EPS

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Infinera Revenues

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Again, estimates revisions don't seem to explain the 50% price haircut. The newsflow around its business has been overwhelmingly positive. I have highlighted before the potential pressure from insider selling, but I don't think that's enough to explain this much selling. The company is a newbie to the public markets and it's looked upon as a hypergrowth candidate. If it disappoints at all (which I have no reason to think it will) you could see it go down to just a little above cash and rot there for a long time. If it gives shareholders reasons to believe its growth path is on track, and/or it uses the cash from its secondary for an accretive acquisition, this could be a moonshot: $7 down / $35 up.

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Positions in INFN, RVBD, CIEN, FFIV
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