Investing in Internet2
10/17/2003 12:00 am EST
"I expect technology stocks to be substantially higher by this time next year," says Michael Murphy in his Technology Investing. "Indeed, we are moving into the next wave of technology growth. What will drive this growth? One new cycle could be an expansion of the Internet." Here’s a long-term triple play on Internet2.
"Let me introduce you to Internet2, an ultra-high-speed parallel Internet for researchers, which currently connects 202 universities. Numerous research labs are hard at work increasing the rate at which data move through optical fiber. Scientists at Stanford have transferred data at a spend that’s roughly 3,500 times faster than a typical Internet broadband connection.
"Meanwhile, the Department of Defense is installing an all-optical network compatible with Internet2. The network will first connect the big research labs to selected universities, military bases, and intelligence sites. Known as GIG-BE, for Global Information Grid—Bandwidth Expansion, this is an all-optical secure network. Initially, 92 sites were chosen for an $877 million program, most of which will be connected by September 2004. Another 600 locations will eventually link to GIG-BE, and contacts could amount to close to $6 billion over the rest of the decade.
"But this is just the beginning. Once the infrastructure is in place, this next generation Internet will move beyond academia and government to corporations and individual users. And best of all, this super-speed technology will inevitably spread to the commercial Internet. And that's where it gets big. The initial $6 billion in investment will eventually look like a drop in the bucket. This is a major evolution of the Internet.
"We don't need to invest in all of the players; we can benefit from this wave of technology by investing in three of the best. The Defense Information Services Agency will select a prime contractor with overall responsibility for the project, and that will likely be Cisco Systems (CSCO NASDAQ). Roughly 15% of revenues already comes from the government, and they have the necessary secret clearance to do the job. I think Cisco will supply the routers for the network and help integrate older technologies into the new high-speed system.
"Meanwhile much of this new equipment will be built with components from JDS Uniphase (JDSU NASDAQ). The company manufactures products for fiber-optic communications. It is the leader here, and has virtually no competition in the field. To round out our opportunity from this major Internet initiative, I also recommend a small, emerging-technology firm, Sycamore Networks (SCMR NASDAQ), which sells software-based intelligent optical switching products. These switches enable faster connections and better integration between technologies.
"Together, Cisco, JDSU and Sycamore gives us a nice triple play on GIG-BE and Internet2. My current target for Cisco is $40 a share by 2006, which may prove to be a conservative outlook, depending on how big a chunk of the GIG-BE project Cisco secures. JDS Uniphase is a buy below $4. My target for 2006 is $12 a share. Sycamore should be able to hit $7 in a better environment; buy under $5.50."