Murphy: In the Zhone

01/09/2004 12:00 am EST


Michael Murphy

Former Editor, New World Investor

Despite widespread pessimism toward technology stocks early in 2003, Michael Murphy correctly forecast an anticipated bottom in the tech spending cycle, and predicted accelerating growth as the year progressed. He sees continued growth as the next wave of technology unfolds in coming years. Here's a tech favorite for 2004.

"Zhone Technologies (ZHNE NASDAQ), founded by CEO Mory Ejabat, recently came public via a reverse merger with Tellium, an optical switch company. Ejabat was president and COO of Ascend before the IPO in 1995, and then served as CEO. During his reign, sales grew from $40 million to $2.3 billion. He bought Cascade for $3.7 billion in 1997, Stratus Computer in 1998, and then sold the whole operation to Lucent for $24 billion at the peak of the mania in 1999. He later raised $500 million in venture capital and leveraged buyout money to start Zhone, which, like Ascend, focuses on connecting at the edge of the network.

"Zhone used most of their capital to acquire eight companies in the telecom bust in 2001 and 2002.  Zhone expects to be at breakeven cash flow in the first half of 2004. Morgan Stanley, one of the advisers on the merger, is looking for 2005 sales of $116 million to $145 million. The upper end of that range translates to around $2.00 a share. This stock can easily sell at 5X sales, or $10 a share. The combined company has over 250 customers, both optical switch and network edge products, management with extremely high credibility on Wall Street (Mory made a lot of people a lot of money) and cash. Buy under $6 for a $10 target by the end of 2004."

Michael Murphy will be participating in Technology World Leaders Panel at The World Money Show in Orlando, Florida, February 5, 2004. Tickets are $59.00 through January 22, $69.00 afterwards. Click here for more information or to purchase tickets.

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