Telecom Comes Bouncing Back

SAN FRANCISCO (04/19/2000) - One of the remarkable aspects of the market gyrations of past weeks is the way everyone, regardless of their prospects, got hammered. But if any sector is poised to bounce back strong, it is telecommunications.

Telecommunications analysts are a little frustrated that their sector has been battered along with other Net stocks. The telecom sector is, unlike many vaporous Web businesses, largely a tangible, sustainable business. The equipment makers essentially are manufacturing companies, and profitable ones at that. And the carriers, with their Internet pipes, will be indispensable.

"These companies have been bludgeoned like a wet, whipped puppy in the corner," says Reg King, a telecom analyst for Hambrecht & Quist. "But that was only because investors can't differentiate between infrastructure or enabling companies and the Joe Blow.com sites that won't be here tomorrow. But these companies have to bounce back because if eToys and everyone else will be around, they will need these enabling technologies."

King points to Kana Communications as an example of an e-business infrastructure company that was unfairly penalized in the market free fall.

"These guys and other providers like Phone.com had to rebound because they make the applications that make people money," he says. "In times of decline, you have to turn to the companies that will make you money."

Kana was up $6.31, to $35.94, though Phone.com fell $3.56, to $77, today.Investor money began coming back to the blue-chip equipment makers such as Cisco, which was up a couple of percentage points. Another highflier, Juniper, jumped even more, up 14 percent. But if the market collapses and carriers scale back their network construction, and if the demand for bandwidth and new applications plunges, over-capitalized startups with few customers are expected to fail. But carriers and equipment makers with ongoing contracts for networking business are going to be fine.

Things can only get better if Sprint and other carriers continue to announce strong earnings.Overall, analysts have seen no slowdown in build-outs of new networks or infrastructure. Some burgeoning industries, like the application service provider business, have yet to prove themselves viable and are taking a hit, but no one has announced that they are scaling back. Overall, telecommunications companies are coming back strong.

A downturn would be hard on startups but wouldn't necessarily be disastrous for the industry. "If things do get worse, I think you're going to see it become harder and harder for people to win contracts," says David Cooperstein with Forrester Research. "It will force people to think strategically and long term about how they build out their infrastructure. That can only be a good thing."

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