This article was originally published on August 6, 2014 and the ad is circulating again and sending a lot of questions our way. The same stock is being touted and teased, and the original article below has not been updated or revised… the stock teased is up by about 50% since it was first teased, thanks to a big “beat and raise” quarterly release in October, so it’s working out well so far.
I was reading the latest pitch for the “next Internet” and thinking that it was yet another spiel about the “Internet of Things” that we’ve covered so many times (like the Fool’s “The Internet Disappears” or Marc Lichtenfeld’s “Web 3.0” pitch)…
… or even about the “wearable tech” revolution that’s often likened to the “Internet of Things” — with the specialized little chips that everyone from the Fool to Michael Robinson believes will change the internet and the world.
But no, this one’s a bit different. Thankfully. Not that I disagree that the “internet of things” will be huge or that wearable tech will continue to advance, but I’m a little sick of seeing the same little chip companies teased over and over. Ray Blanco is touting the “Internet of Things,” sure, and also talking about how drastically different the next version of the Internet will be… but he’s not touting the next wave of internet sensors or internet-connected chips or wireless modules, he’s focusing on the vast demand for broadband that this “next internet” will create when thousands more objects are connected and transmitting data.
So he’s got a photonics stock to tease for faster fiber optic networks — one that he says has set a Guinness Record for their speedy networking, and that can transmit data thousands of times more quickly than conventional networks.
Sounds interesting, right? Well, what is it?
Now, now — before we get ahead of ourselves, let’s just see how it is that Ray Blanco gets our pistons firing for this idea. He talks about the “Mysterious billionaire” who got everyone excited about a “wealth event” in the next version of the internet back in January (that’s John Chambers of Cisco, who can’t tie his shoes without saying “Internet of Everything” and gave a big address about it as the keynote speaker at the Consumer Electronics Show in January).
And then throws in some more hyperbole:
“‘The biggest business opportunity in the history of mankind’
“Even Time has written about this, calling it the ‘next big thing.’
“In fact, they went on, ‘We’re talking trillions of dollars here, not billions.’
“There’s Business Insider, who says this could be, ‘Bigger than the smartphone, tablet, and PC markets combined…’
“And of course, Wired, which calls this same event… ‘The most monumental tech boom to date…'”
So that’s all about this “Internet of Things” still, not specifically about this company. Let’s start digging into the clues for the stock Blanco is teasing:
“What I’m guessing that you haven’t heard yet is why this huge phenomenon — worth a potential $19 trillion — might be in danger of not happening at all.
“At least, not without the breakthrough I want to reveal to you today….
“… there’s one very big [challenge] that must be overcome before the ‘Internet of Everything’… or even today’s crowded Internet… that must be dealt with first.
“I believe I’ve found the company that figured out how to deal with it.
“And it’s this company, I believe, that you’ll want to look at first.
“Preferably before you go chasing fortunes anywhere else in the exploding new ‘Internet of Everything’ marketplace.”
And yes, it’s all about connection speed, bandwidth and internet congestion:
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“If the Internet is a digital pipeline, bandwidth measures how much data can pass through it at any given time. And already that amount of available space is running out.
“If you’ve ever noticed a slower connection speed… videos that buffer… super-slow emails… or dropped chat connections with the grandkids… you know what I’m talking about.
“As the ‘Internet of Everything’ explodes from 9 billion connected devices… to over 75 billion… what happens then to those already crowded digital ‘pipelines’?
“And this is the huge opportunity.
“In fact, even if the entire ‘Internet of Everything’ wealth tsunami gets postponed by another year or more, this is where you’ll want to look for a potential tech market bonanza.”
So that’s the big picture argument. On to the clues about this specific company:
“The Tiny Breakthrough That Could Unleash This Entire New Wealth Revolution
“Their answer is so tiny it fits on your fingertip.
“It’s called a ‘photonic integrated chip’…
“… silicon microchips are overdue to be replaced.
“And these “photonic integrated chips” could be that answer.
“Photonic” just means it uses light-guided circuits. They’re literally tiny lasers, packed into a space that’s just 1 centimeter square. It’s the laser light that moves the data back and forth.
“See, nothing moves faster than light.
“What this company’s chips do is take the data we usually send over the Internet… and code it onto different bands of light. This then gets shot out across the network on fiber-optic cables.
“On the other side, the same photonic chips put it all back together.
“The result is data that gets sent many times faster than anything you or I are used to now.”
OK, so they can make photonic chips. There are several decent-sized companies working on that (and lots of startups and venture-funded companies), so which one specifically is Blanco teasing? More clues:
“The new secret ingredient, instead of silicon, is an optical superconductor called indium phosphide. It’s the breakthrough that lets us pack so many laser circuits on each chip.
“And nobody so far is better at it than this company.
“One of their earlier chips can power a network connection at 100 gigabytes per second. That’s about 5,626 times faster than what most Americans can get right now.
“At that speed, this company shot to the No. 1 position for building high-speed networks just three months after this early chip was released… with more than a third of all 100-gigabyte networks running on this company’s photonic technology….
“… has kicked up its photonic technology to create a 500 gigabyte-per-second chip. They call it a “superchannel” chip. And it’s 28,130 times faster….
“… as Sterling Perrin, a top network and telecom expert, put it… ‘[This company] is four years ahead of the rest of the optical industry…'”
A four-year lead sounds pretty impressive — I doubt that I’ll understand enough about the science to tell you if that’s true or not, but we ought to be close to naming the company now. Just one more little tidbit:
“… they’re lab-testing a next generation photonic chip… that could power a 1 terabyte-per-second network. Breaking that barrier is the ‘holy grail’ for networks….
“In August of last year, technicians from this company did something nobody even imagined possible. They built a 228-mile computer network that ran at 8 terabytes per second….
“It was so fast, in fact, the entire demonstration — which took just 19 minutes to set up, start to finish — is now registered in the Guinness Book of World Records.”
Well, you knew there had to be something misleading in there — there always is. They did make it into the Guinness Book, but they did so not because of the 8 terabytes per second, which is not new, but because of the 19 minutes … the novelty of their solution, in large part, is that it made switching faster and easier. This stock is Infinera (INFN).
The announcement of the record is here — it’s for ” fastest provisioning of long-haul multi-Terabit transmission capacity on a live network.”
Sounds sexy, right? I’m sure it’s quite impressive, but I do wonder if anyone else has tried to set the record for “fastest provisioning”… or whether second place would be 20 minutes or three days.
Infinera is a substantial player in optical switching — it seems, from my quick reading on the topic, that their three big competitors in this niche seem to be Ciena (CIEN), Alcatel-Lucent (ALU) and Chinese giant Huawei … though in the US Huawei seems to have been locked out of the core optical switching market because it’s Chinese. Ciena is a pretty comparably sized company ($2 billion market cap vs. $1 billion for INFN), and has a longer history, but both stocks have been pretty weak long-term performers over the last seven years (INFN went public in 2007).
INFN appears to be priced with some big growth expectations, so Ray Blanco isn’t the only one expecting big things — the stock is trading for about 35X this year’s expected earnings (well, half earned and half expected) and 25X 2015 earnings estimates, and analysts see them boosting earnings at a torrid rate of 20% a year even after next year’s near-50% increase. They blew out earnings estimates this past quarter, it appears, and said all the right things about having great growth opportunity in the current wave of network upgrades as bandwidth hogs like online video and streaming and cloud computing pressure the networks.
Analysts have increased their estimates for INFN for both this year and next year, but the stock has always looked pretty expensive and traded on the growth expectations in this sector so investors didn’t get all that excited — they’ve apparently been waiting for the real burst of growth and the expected contract wins with big telecoms for years.
I was sniffing around and found this interesting article from Seeking Alpha about their prospects and the huge growth potential… but that was from last year when the stock was also around $9 (it since surged to $12 then came back down), so while it gives some idea of the kinds of things that can drive growth in the sector I’d want to understand the business quite a bit better before jumping in on a stock with this kind of valuation. The earnings upgrades and the revenue growth are substantial and impressive, and it may well be that the company has finally gotten their base built up to surge forward with their relatively new product (DTN-X) in the 100G network upgrade cycle (see, didn’t that sound like I know what I’m talking about? I don’t), but I have no idea what Alcatel-Lucent or Ciena or the big customers like Verizon and AT&T are doing.
Surely there are some folks out there in Gumshoedom who understand telecom networks and upgrading better than I do, so feel free to jump in with a comment below and tell me if you think INFN is really a great stock on the verge of huge growth — there are some underpinnings that provide hope, but I just don’t know enough about them.