Is Fiber Really Good for You?

SAN FRANCISCO (07/31/2000) - Investors have shown great interest in optical networking and infrastructure IPOs recently, but one such IPO this week begs the question of whether investors have forgotten the lessons learned from the recent market downturn.

Corvis went public Friday, at one point rising 172 percent from its offering price. Early signs showed that Corvis' underwriters, which include CS First Boston, Robertson Stephens and Banc of America Securities, were optimistic about the potential for a strong IPO. Despite the fact that the company generated no revenues since its inception in June 1997, the offering was priced last month at between $13 to $15 per share, on 27.5 million shares. At those levels, the offering likely would have garnered $385 million for Corvis.

Around the same time, ONI Systems, a company that manufactures optical-networking equipment specifically designed for use in metro areas, had just gone public. ONI saw first-day gains of 230 percent on its Goldman Sachs-led IPO, setting the stage for several more fiber-related names to come to market with great fanfare.

But that was June. Apparently, investor enthusiasm for fiber names has since widened. On Tuesday, Corvis upped the expected pricing range of those shares to between $28 and $30. Two days later, the IPO priced 31.6 million shares - more than originally planned - at $36, meaning the company now could generate $1.14 billion from its IPO, nearly three times the originally expected amount.

Obviously, that figure is great news for Corvis. Fiber-optic networks are very expensive to develop, install and run, and Corvis can expect heavy competition from the likes of Alcatel (ALA) , Ciena, Cisco, Lucent, NEC and Nortel. Having the legroom that such a deep war chest offers lends credence to the argument that Corvis can be a successful contender in its space.

The massive valuation that the IPO placed on Corvis stock sets the bar dangerously high for the company. At $36 per share, the 328.8 million shares that will be outstanding after the offering gives Corvis a market capitalization of $11.8 billion - not bad for a company that has managed to lose $118 million in just three years, with no current top line to support operating expenses.

Revenues are predicted, but they are not yet definite. The company expects to see $550 million from three companies, Broadwing Inc. (BRW) Communications, Williams Communications Group Inc. and Qwest Communications, according to its SEC filings, but those commitments are contingent upon the completion of field trials. Corvis mentioned in its filing that field trials were completed this month for Broadwing and that the trials with Williams Communications would be finished in the second half of 2000.

Even still, the revenues are not set to roll in for some time. Each of the customers have committed to purchasing Corvis technology over two-year periods, and Broadwing and Williams will begin paying up later this year or early next year. Qwest's purchases are "subject to our products being priced competitively and our ability to make products that meet the agreed technical requirements by the end of 2001," according to Corvis' filing. So under an optimistic scenario, Corvis might see revenues of $200 million next year. That's not bad, but it places the company's valuation of $27.9 billion on the close of its first day, 139 times what could be next year's revenues. That paints an extremely optimistic scenario.

Now priced into the company's stock is absolute perfection in business execution. The market for fiber-optic infrastructure stocks might just be another bubble in the making.

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