Mad Dash to Nasdaq: JDS Uniphase, King of the Optical-Fiber Hill

The stock's been a huge gainer this year as investors have lined up to get into the bandwidth revolution.
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JDS Uniphase

(JDSU)

, and it gets all carried away.

Here's the story: Telephone carriers and ISPs are straining to ease traffic bottlenecks by fattening their fiber-optic networks. Companies such as JDS Uniphase,

SDL

(SDLI)

and

E-Tek

(ETEK)

furnish the bundles of amplifiers, filters and other components that solve those problems.

And here's where the market gets carried away: JDS Uniphase's stock has climbed nearly eightfold this year, and like that of many

peers has roughly doubled in the last two months. It finished Tuesday up 5 1/2 at 259 3/4, giving the stock a market value of $45.1 billion. Investors, who for months have been swooning over the stocks of companies that supply the nuts and bolts to expand telecommunications networks, are basting other Net infrastructure plays in their enthusiasm as well: JDS Uniphase customer

Ciena

(CIEN) - Get Report

Tuesday gained 11 1/2, or 24%, to 60 1/16 after the London-based carrier

iaxis

expanded its plans to deploy Ciena's new optical systems.

And because JDS Uniphase sells the biggest bundle of components, it boasts the highest profile among investors -- and the most richly valued stock in the bunch. JDS Uniphase has traded at 63 times its revenue in the last four quarters, compared with SDL's price-to-revenue ratio of 45 and E-Tek's ratio of 33.

One East Coast money manager, who first invested in JDS three years ago, has lightened his position lately because he worries that JDS Uniphase has run its course. He says "it's ceased to be a fundamental story."

But that clearly remains the minority view. "Everyone is happy to voice valuation concerns," says Arun Veerappan, equity analyst with

Robertson Stephens

who started JDS Uniphase at buy about two months ago when it traded at 150. "But they start to get cold feet when it comes to selling." Robertson Stephens hasn't done any underwriting for the company.

"People have recognized that the next 20 years will be the years of bandwidth, rather than semiconductors," explains CEO Kevin Kalkhoven.

Analyst Charlie Willhoit with

J.P. Morgan

says JDS Uniphase's broad module offerings will be best poised to serve customers such as

Nortel

(NT)

,

Lucent

(LU)

and other large builders of network equipment, as they enlist outside specialists for optical components. Willhoit rates JDS Uniphase shares buy; his firm has no banking ties with the company.

Look for JDS Uniphase to increase revenue 71% and operating profits 65% next year from 1999, says analyst James Jungjohann with underwriter

CIBC World Markets

. Researcher

RHK

expects the optical network component business, excluding undersea and cable television systems, will grow 50% annually to more than $6.7 billion in 2003 from $1.4 billion this year.

The story was a long time in the making. Its predecessor Uniphase, unlike many of Silicon Valley's new ventures, actually did start in a garage -- 20 years ago. For more than a decade it fashioned lasers for such uses as DNA sequencing and testers for silicon chips. In 1995 Uniphase CEO Kalkhoven, an avid skier who has described himself as a "failed geologist," started acquiring fiber-optic specialists such as

United Technologies Photonics

and

Philips Optoelectronics

in Eindhoven, the Netherlands.

In July Kalkhoven cut his boldest deal yet,

marrying Uniphase with

JDS Fitel

of Nepean, Ontario. The aim is to couple Uniphase's array of "active" components, which emit and manipulate light signals, with JDS Fitel's "passive" conduits for guiding light.

"They sell the bullets for the bandwidth war. Why is everybody suddenly realizing it? I don't know," says the East Coast manager. "It's kind of upsetting," he adds. "Now I have to look elsewhere" to invest new money.