Five Ways to Play Telecom's Triple Play

03/22/2007 12:00 am EST

Focus:

James Oberweis

President, Oberweis Asset Management, Inc.

Ticker symbols APKT OPLK ALLT OPNT CSCO

Jim Oberweis, president of Oberweis Asset Management and editor of the Oberweis Report, finds several telecom-equipment companies likely to benefit from the disruptive move of telephony to the Internet.

Talk about a disruptive technology and a case where new economy seems destined to trump old: Voice over Internet Protocol (VoIP) is finally gaining traction and cannibalizing Thomas Edison’s “two tin cans and a string” version of the telephone.

With VoIP, your voice is converted into a digital signal that travels over the Internet. If you are calling a regular phone number, the digital signal is converted to a regular telephone signal before it reaches the destination. In the last year or so, quality of VoIP has dramatically improved. I find it virtually indistinguishable from traditional landline connections.

IP networks combine voice and data on one single network, allowing telecommunications companies to simultaneously offer TV, internet, and digital telephone across a single broadband connection.

Industry bigwigs have labeled this trifecta of offerings the “triple play.” VoIP is causing an exponential increase in demand for bandwidth, gobbling up much of the overcapacity left after the Internet bubble burst. Traditional carriers recognize that they have to convert or die, and virtually everybody in telecom is focused on building out their IP networks and delivering broadband directly to your home.

We think that the IP network build out is real, and those making products to enable efficient and secure expansion of bandwidth are likely to perform well.

Among our favorite beneficiaries is Acme Packet (NASDAQ: APKT, $15.80), a firm that develops session border controllers for IP networks. Session border controllers rest on the edge of the network and help to control traffic flow, and Acme is the market leader. [The company] went public last October, and while the stock price is higher now, earnings growth has been strong. Revenues for the first nine months of 2006 grew 158% year over year to $60.4 million.

Another good choice is Oplink Communications (NASDAQ: OPLK, $18), a high-growth provider of optical network components. Israel-based Allot Communication (NASDAQ: ALLT, $9) designs IP network optimization appliances that also help to manage network traffic. Yet another beneficiary is OPNET Technologies (NASDAQ: OPNT, $14). Opnet is an analytic-driven network management software provider. A hot stock in 2000, its shares have languished during the slow telecom cycle but it is well poised for growth once again.

One big name that we think is worthy of consideration: Cisco (NASDAQ: CSCO, $26.70). As the market leader for routers, exponential growth in traffic will likely stimulate sales in the years to come, yet the stock’s P/E of 21x is still at the low end of its historical range.

No matter how you think the IP telephony game will play out, there is no question bandwidth requirements are on the rise. Providers of solutions to the bandwidth bottleneck have the wind at their back. Now is the time to put up your sail.

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