Murphy: The case for JDSU
12/13/2002 12:00 am EST
"I get more questions about JDS Uniphase than any other stock," says Michael Murphy, editor of Technology Investing. "And for good reason. This dominant supplier of fiber optic components was a Wall Street darling during the tech boom, but it suffered more than most in the tech depression. JDSU, now trading near $3 a share, closed at a split-adjusted high of $146.53 in March 2000. Why the heck would we want to own a stock like that?" Here, he explains why.
"JDS Uniphase (JDSU NASDAQ) is priced like a perpetual option, and investors with a four- to five-year horizon should be rewarded tremendously. As long-term investors, that is what’s important to us. The company is and will be the dominant supplier of optical components for many years to come. The downside is that we have to be patient. They make optical components to go into systems that enable carriers to increase capacity per fiber at a lower and lower cost.
"JDSU’s customers—the likes of Lucent, Nortel, and Alcatel, who sell to telecom service providers—have not seen an upturn in business. Telecom carriers continue to be cautious in their capital spending plans, and in all likelihood next year will be another down year. RBOCs are suffering amid a soft economy and weak pricing power, and they are compounding their problems by not investing in new technologies with faster growth and higher profit margins.
"Business will turn around; it is a matter of when, not if, and JDSU will be the leader. Internet traffic is still growing, and we are already out of capacity on several major city pair routes. This part of the Internet backbone infrastructure has to be expanded soon to avoid a significant deterioration in Internet speeds and quality of service. Corporations are already complaining to the telecom carriers, and it’s only a matter of time before they’re forced to do something about it.
"Over the next few years, I expect JDSU stock to trend steadily higher. The stock could easily double over the next two years, then double again in the following two years, which would give you at least a 300% return from current levels. Buy up to $4."