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Internet Fervor Sparking Whacked-Out Valuations

Are the huge valuations for small-fry firms unreasonable or a prescient pick of future value?

The Quality and Quantity of Stupid

SAN FRANCISCO -- A particularly cynical market strategist I know must have had an extra bowl of Cynic-Os this morning. He called today to ask, "Is Wall Street really this stupid?" He then answered his own question with a resounding "Yes!"

a la

Marv Albert


The impetus for this particular rant being market caps. Specifically,

Safeguard Scientifics


, whose capitalization is $3.8 billion, despite the fact that the company retains a 14% stake in

Internet Capital Group


, which has a market cap of $18.9 billion.

Given that 14% of $18.9 billion is $2.6 billion, the Street is essentially valuing all of Safeguard's other assets -- which are extensive -- at $1.2 billion. One of the company's market caps "must be facetious," the strategist continued. "Either Safeguard should be worth 10 times more or Internet Capital divided by 10."

I referred the source to a recent

column by

Adam Lashinsky

which sought to explain the discrepancy. But the strategist -- whose firm has done no underwriting, nor has trading positions, in either stock -- remained incredulous.

"It's unbelievable," he said, before changing the subject midstream and proceeding to go ballistic about the "outrageous" market caps afforded recent IPOs such as

Sycamore Networks



Despite producing revenue of $11.3 million and a loss of 51 cents per share for the year ended July 31, Sycamore has a market cap of $17.6 billion.

The outrageousness stems from a view that dense wavelength multiplexing -- which increases the amount of light waves traveling across a single optic fiber, thus dramatically increasing transmission speeds -- will be a $20 billion revenue business in three years. The source couldn't say with 100% certainty, but recalled the projections coming from

Electronic Engineering Times

, a trade publication. (However, I could not independently verify that.)


J.P. Morgan

analyst Charles Willhoit -- relying partially on estimates from research firm

Ryan Hankin Kent

-- projects the market for optical components will jump to $20 billion to $25 billion in 2003 from $5 billion this year.

Return of the High-Tech Heretic

Just for kicks, I bounced this off Roxane Googin, editor of the newsletter

High Tech Observer

. I'd been meaning to call Googin anyway, as certain events -- namely




third-quarter earnings and an article in

The Wall Street Journal

last week about "Windows-Less" PCs -- reminded me of our most recent


Googin took exception to the strategist's cynicism, musing that Sycamore may be "undervalued," especially considering


was bought by



for $6.9 billion.

"The hang-up is getting stuff off and on the high-speed backbones, and I think Sycamore is going to be an important" part of the solution, she said.

Furthermore, Googin called the $20 billion projections "conservative," noting

SBC Communications


alone is planning to spend about $4.7 billion to build its fiber-optic network.




recently announced it will triple the production capacity of its optical-components business, an area it sees growing more than 50% annually to over $35 billion in 2001.

Googin's favorite play in the optical space is

JDS Uniphase


, whose stock is up over 450% year to date and 64% just since Oct. 19.

Today, the shares traded as high as 204 1/8 and as low as 181 before closing up 1/2 at 191 7/8 on

news JDS Uniphase will acquire

Optical Coating Laboratory


, whose stock leapt 41%.

The acquisition of Optical Coating will allow JDS Uniphase to expand its production facilities and catch up with demand for optical-network components, CEO Kevin Kalkhoven said.

The deal provides Uniphase with "a key technology in the evolution of bandwidth," Kalkhoven said. Specifically, Optical Coating makes special filters that allow 100 or more differently colored light waves to pass simultaneously through a fiber.

Uniphase is "putting together a one-stop shop that no one else can touch," Googin said in reaction to the deal. "It pays to have enough currency -- i.e., stock -- to put pieces together that might be expensive for other people. That's why Cisco has a big advantage."

Returning to an old theme, the newsletter writer recommended investors "get rid of all your Intel and buy JDSU," because "they make the critical components" for the next phase of the industry.

And the Winner Is...



Chairman Alexander d'Arbeloff gets the "Alan 'Ace' Greenberg/Barton Biggs" award for being the most-painful-to-watch guest on


today. Apparently, the chip-equipment industry executive is immune to the charms of the divine

Maria Bartiromo


The "And the Stomach Turns" award goes to "Squawk Box" for its unrepentant fawning this morning over Joseph Battipaglia,


chairman of investment policy. Amid all the back-slapping and glad-handing, nobody bothered to ask "Bat Man" about why he was so conspicuously quiet during the correction of September and October. (By the way, he was unavailable for comment today, same as Sept. 24, Oct. 12 and Oct. 22, when I tried to reach him during the downturn, according to's

internal database.)

Then again, if the


people asked Battipaglia about the prudence of his unwavering bullishness, they'd have to apply the same standard to

Goldman Sachs'

Abby Cohen

, whose appearance before the

Securities Industry Association

in Boca (darling) today was treated with


-esque reverence.

Aaron L. Task writes daily for In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at

Staff reporter

Kevin Petrie contributed to this report.