The projected growth of Internet traffic is as certain a theme as there is in the market today, but you would never know it by looking at shares of JDS Uniphase (Nasdaq:JDSU) and Akamai Technologies (Nasdaq:AKAM). Both companies have seen their stocks lag sharply in 2011, sending momentum traders running for the hills and creating an opportunity to play a powerful growth theme without having to pay excessive valuations.
First, the good news.
Last month, Cisco released a report predicting that nearly three billion people will be using the Internet by 2015, while the number of Internet-linked devices will rise to 15 billion. The result, Cisco predicts, will be quadrupling of global Internet traffic. This provides the opportunities for Internet-backbone companies to benefit in two ways: first, from the increased number of devices in use; and second, from the ongoing build-out of the networking infrastructure and 4G capabilities in the emerging markets.
Still, concerns about slowing end-market demand – and weaker global growth in general – have driven expectations to rock-bottom levels, opening the door for those with a longer-term view. JDSU and Akamai, both of which are well off of their first-quarter highs, are two of the best ways to play this disconnect.
JDS Uniphase
JDSU, the world’s largest maker of fiberoptic testing equipment, has experienced nothing but bad news thus far in 2011 – from rising competition and weak demand to slower government spending. As a result, the bear case is now firmly established. The stock is down 46% from its 2011 high, leaving it forgotten and unloved – but also trading at its lowest valuation (13.3x 2012 fiscal year estimates) in almost two years.
Still, earnings estimates have remained stable even as the stock has come down in the past three months. Current estimates for 2012 stand at $1.12 now, versus $1.14 ninety days ago. JDSU has also managed to beat analysts’ estimates at the same time as other companies in its space, including Finisar (Nasdaq:FNSR), Oclaro (Nasdaq: OCLR) and Opnext (Nasdaq:OPXT), badly missed expectations. JDSU’s next earnings report is scheduled for August 22.
This stock could continue to face some near-term headwinds, especially if the broader market remains unsteady. Longer-term, however, JDSU stands to benefit from its expansion into new business lines, and it looks set to reap the benefits of the cost cuts it has enacted over the past two years. As a result, any additional weakness in JDSU should be viewed as an opportunity to buy cheap shares in a company that is well-positioned to benefit from rising global bandwidth.
Akamai
Akamai, a provider of services that accelerate the delivery of content and applications over the Internet, is more than 40% off of its January high. Its shares have fallen due to a broader industry downturn, rising competition and weak earnings guidance, but the stock is now trading at just 16.7x forward earnings, its lowest level since 2009 and deeply below its historical average. But as is the case with JDSU, earnings estimates are holding steady – creating a chance to buy a company that’s fundamentally sound but very out-of-favor. Akamai reports July 27.
There are two other reasons to like Akamai. First, with a rock-solid balance sheet, high profit margins, and $5.6 billion market cap, Akamai represents a potentially attractive takeover candidate. Second, Akamai’s technology is used by the majority of the top social networking sites.
Recall that in the Internet boom of the late 1990s, the initial run-up in Internet companies was followed by hype for the “bricks-and-mortar” Internet companies. With the rally in LinkedIn (Nasdaq:LNKD) showing a similar mania developing in social-networking stocks, it is only a matter of time before we begin to hear about social-networking infrastructure plays. Akamai is primed to benefit from this trend.
The bottom line: Neither JDSU nor AKAM is a sure bet for a short-term trade at this point, but both offer inexpensive ways to capitalize on the longer-term expansion of the global communications infrastructure.
