You know a sector is a little overheated when three out of every four companies presenting at an equity investment conference are privately held. It's sort of like being shown houses in the Silicon Valley that aren't yet for sale.
But that's what brought out the curious and the clever to the
Thomas Weisel Partners Emerging Networks Conference
at the San Francisco Ritz-Carlton Thursday and Friday. All were hoping to get a good early look up the white-hot pipeline of soon-to-be-public optical infrastructure offerings.
Some of the attendees -- mostly West Coast money managers -- sat in so they could learn how to distinguish optical backbone manufacturer
from optical component maker
or optical switching developer
. Others, given the importance Wall Street has placed on anything optical, came because it was a must-attend event.
Lots of Demand
"A lot of these people might not know these companies, but they know they need to be buying them," says Weisel analyst Mark Edelen. "We wanted to give people earlier touches on these companies before they come to the market. If you look at how fast things are moving, it is almost impossible to understand what each incremental piece of information means and how to invest in it."
Why the urgency? There seems to be endless demand for and little supply of optical outfits that might become the next
, whose stock ran up more than 1,000% in the past 12 months. In fact, a clear sign that investors were swinging for a new optical home run was the half-empty room that JDS presented to Wednesday, while still-private optical gear maker
commanded a crowd of more than 200, with about 30 people willing to stand for lack of seats.
Investors are gaga for these companies in large part because their stocks appear almost guaranteed to jump right out of the ballpark -- if the recent performance in the sector is any gauge. In one of last year's more memorable debuts, high-capacity Internet router maker
saw its shares jump nearly 900% after its IPO. And fiber-optic newbie
went vertical on the day of its initial offering last month, opening at 36 and ending the day at 172.
Not Just Momentum Players
But not all the investors on hand were looking to ride the momentum onto the newest new thing. Ron Sloan, a money manager with
, was doing a little homework on the coming crop of opticals so that when the moment is right he could strike quickly.
Sloan runs a mid-cap blended fund, and he is keen on growth stocks at reasonable prices. In other words, when one of the hot infrastructure darlings misses earnings one quarter, he's there with a truck to load up the distressed merchandise.
"Momentum buyers are weak holders," says Sloan. "It doesn't take much to shake them up, and they'll sell at any price. That's just an opportunity for us to get involved at a cheap price."
Unlike cooler sectors, in which new companies must demonstrate months and even years of success at making and selling good products, "show me" in the communications infrastructure field seems to take all the effort of nailing a 30-minute slideshow.
The Cisco Factor
For example, after presenting a group picture of his top executives,
CEO Daniel Gatti ardently diagrammed his company's urban fiber-optic loop system that is months away from being a commercial product and has no customers and, needless to say, no revenue.
For Mayan's Gatti, fresh off his third round of private funding, to be strutting around in front of 100 or so money managers with just an unnamed beta product to brag about seemed a little odd. But some CEOs might be prone to such behavior when
top dealmaker, Mike Volpi, is lurking about.
Volpi and Cisco have been on an acquisition clip of nearly two companies per month in the past 12 months. During his keynote address Thursday, Volpi said he's tired of being asked who he's looking at next and then proceeded to describe the types of companies that fit Cisco's buying strategy.
Both Corvis and Tellium have received Cisco investments, and potential investors would be awfully disappointed if Cisco swept either of them off the table.
The thought of it strikes fear in the optical investor's heart because at this stage of the game, the greatest risk is not getting stuck with a bad stock. No, the big risk is not getting in at all.