A Big Bet on More Bandwidth

04/25/2007 12:00 am EST


Tobin Smith

Founder and Chief Research Analyst, Transformity Research LLC

Tobin Smith, editor of ChangeWave Investing, finds a growing company poised for big gains from the big push by cable and telecom companies to add more bandwidth to customers’ homes and offices.

BigBand Networks (NASDAQ: BBND) is the only pure play on one of the biggest transformations in digital entertainment: the transition from broadcast cable TV to what is called "switched digital video broadcasting," which means one program-specific signal to each home.

Switched digital technology means you get whatever show or movie you want when you want it, ALL in high definition. It also means that advertisers can deliver a specific ad to a specific home or neighborhood, the Holy Grail for the industry.

Three of the top five US cable operators have already selected BigBand's switched broadcast solution. Overall, BigBand's switched broadcast technology is now deployed in more than five million US households.

BBND is well positioned to ride a wave of investment by the cable industry in switched digital video and other bandwidth reclamation projects over the next two years.

Cable operators face a clear dilemma: upgrade or die. The only way to gain the bandwidth necessary to compete with Verizon's FIOS (fiber optic service direct to the home) and AT&T's U-verse services is to transition their old broadcast digital systems to switched digital video—meaning they'll deliver channels to subscriber homes only when a viewer tunes into them. (Traditional or "unswitched" cable sends all channels to subscribers at one time, and it's a bandwidth hog.)

BigBand has improved its technology to increase the bandwidth it makes available to users, giving cable operators the chance to offer speeds that rival those offered by Verizon and AT&T’s new services. Increased bandwidth means cable providers will have an opportunity to offer voice, video, and data services using a single Internet protocol network.

Add in the pressure cable is feeling from the 100-plus new high-def channels via the satellite TV providers, and cable and fiber-based networks HAVE TO move to remain competitive.

I believe that AT&T and Verizon will [eventually] adopt switched video architecture as well. (BigBand Networks is already selling its switched product to Verizon, so it has soldiers on both sides of the battle—both cable and fiber!)

2005 revenues for BBND were $98 million, and they grew 80% in 2006 to $177 million!

I model growth rates at 65% for the next 24 months—a doubling of sales from here to close to $500 million in annual revenues. And I think this estimate may be conservative.

Earnings of 70 cents for fiscal 2008 and $1.10 in fiscal 2009 take us to a $40-$45 valuation in 12 to 18 months.

I expect that, as switched high-def video becomes the ONLY way to get high-def channels all around the home all the time, BBND will become a target for competitors like Cisco or Motorola—at a $2.5-billion value. (It closed Tuesday at about $18 for a total market value of around $1 billion—Editor.)

Add BigBand Networks to your Buy List under $22 with a target of $42 over the next 12 to 18 months.


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