We thought that all communications technology should sell at a premium. But what happens if only certain portions of communications technology are selling well?
What happens when we realize that communications technology is not a monolith?
Then we get what happened last week in the Nasdaq: Some communications technology stocks, the ones without the right products, get crushed. Others, the ones with current, up-to-date product lines, excel.
I can't stress how important this all is. It's what derailed
Lucent. It's what caused the real shortfall in PMCS. It's a brand-new pecking order for what was once an imperceptibly different group of players.
Rising and Falling Fortunes
Put simply, the slowdown in Internet infrastructure is very real, but is not spread equally. A look at the companies' products helps explain why everything has gotten so uneven.
The bigger companies, the ones with giant suites of products, will all feel the slowdown because their products are so broad-based. Hence the declines in Cisco,
Nortel, and worst of all Lucent, which has the least impressive product portfolio.
So let's take the fiber industry. First, the dot-coms go bust, so they no longer need their fancy T1 connections. The
Covads and the
NorthPoints get cancellations.
The WorldComs, AT&Ts and
PSIXs of the world slow their orders on boxes. Cisco, Nortel and Lucent see some slowing and some inventory building. Ultimately, the network operating chipmakers feel the pain about eight months after the dot-com implosions. They see the orders last in the chain, so that delay makes sense.
The low end is being hit and hit hard. The higher end is holding steady. That's the sexy new stuff and I see no slowdown there at all.
Tale of the Tape
So how do the players break down?
Corning: Corning supplies the fiber for everything and will see the slowdown this quarter. It hadn't seen it before because fiber is labor intensive and has long lead times.
JDS Uniphase: Optical component makers, similar to GLW, are seeing the slowdown now. I don't know how deep it will be.
PMC-Sierra: PMCS produces stuff mostly for the lower end. That's the heart of the slowdown.
Applied Micro Circuits: AMCC's product range is higher than that of PMCS. It's the leader in those technologies and is not seeing the slowdown, and might not see it at all. That's why it's a much better stock than PMCS.
Conexant Systems: Has a weird mix of low-end (56 k modem) and DSL, which is getting clubbed. But it has a wide area network biz that's growing fast, so there might be something there when the smoke clears.
Broadcom: Special case. This company is creating new markets, including its end-home networking solution, which could be huge. (It's currently being sold through Gateway.) Broadcom is just moving into high-end optical, and could do very well. Wild card.
That's the quick and dirty on why we're seeing such seemingly strange ordering of these companies. It means, simply, that if you're at the highest end, you'll feel the least of the slowdown, while the lowest end will bear the brunt of the pain.
James J. Cramer is a director and co-founder of TheStreet.com. He contributes daily market commentary for the network of TSC sites and serves as an adviser to the company's CEO. Cramer from time to time writes about stocks in which he has a position. In such cases, appropriate disclosure is made. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks.