Agilent's

(A) - Get Report

stock rides on a bubble.

Make that tiny bubbles capable of bouncing light beams from one place to another. Agilent shook the optical networking world a couple of months ago when it said it could get bubbles created by its inkjet technology to redirect laser light and that they could be incorporated into photonic network switching devices. But like nearly all photonic shifts, the hype arrives long before the product.

Shares of the

Hewlett-Packard

(HWP)

spinoff shot up to a high of 162 when the company unveiled this technology at a fiber-optic convention in March. Fueled by a continuing passion for the company's optical talents, shares are currently trading at 88 1/2, still double the company's IPO price in November.

Not to put too sharp a point on it, but the bubble device is not expected to figure into this year's revenue, and only one network operator, France's

Alcatel

(ALA)

, has had the courage to say it is trying out the technology for possible use in future network gear.

It seems investors, possibly overly optimistic about Agilent's optical edge, are bidding up the company, which on closer inspection is deeply rooted in less glamorous fields such as diagnostic equipment used in the health care industry and for chemical analysis. Weakness in Agilent's health care division figured high in today's second-quarter earnings release. The company said that despite disappointing performance in health care, overall net revenue was $2.5 billion, a 24% increase from a year ago.

Peeling back a few layers of hype, Agilent does have some strength in the optical field; optical components make up about 16% of its total sales.

"The optical business has been what has captured all the attention of investors and made for the sex appeal of this story," says

Goldman Sachs

analyst Deane Dray, who has a buy on Agilent, his firm's highest rating. Goldman Sachs was an underwriter of Agilent's IPO.

Optical switching is commonly viewed as the future of networking because it represents a severalfold improvement on slower electronic switching. Many liken the change to the jump from transistors to integrated circuits.

Investors keen to cash in on the light-borne revolution have

warmed to companies such as U.K.'s

Bookham Technology

(BKHM)

. And the networking giants

Lucent

(LU)

and

Nortel

(NT)

have made efforts to get optical switches into their sales.

In March, Nortel agreed to pay $3.25 billion in stock for micromirror optical-switch maker

Xros

. Lucent has promised to have its LambdaRouter optical switch commercially available later this year. And Germany's Siemens says it is working with a San Diego firm,

Optical Micro-Machines

, in field tests.

So in a strong and diverse field of optical competitors, it's not clear that Agilent will shine in the end. Since its big splash in March, the company has been unusually sober in its guidance regarding the bubble device.

On a conference call to report the company's fiscal 2000 second-quarter earnings, Agilent CFO Robert Walker said there is no shortcut to perfecting optical switching.

Photonic switching, says Walker, "is a very significant technology, but it is going to take the suppliers of telecom equipment a while to design that capability into their products."