Thursday, September 22, 2005

"This isn't an investment newsletter, period"

DSL Prime's Dave Burstein defends his covering of the upcoming Ikanos IPO in his latest newsletter. Taken more generally, it reads like something applicable to my blog as well. Here is the full quote:

I wouldn't give much credence to the unfortunate Forbes story, because the reporter showed no understanding of the DSL chip market. In "For This IPO, Keep Your Chips Off The Table," Reporter Scott Reeves found legitimate risk factors in the IPO including just a handful of customers, the difficulties inherent in advanced chip technology, and downward pressure on prices. Reeves concluded, "you probably don't want to add a small, money-losing company to your portfolio--especially when there are larger, established companies in the sector. Look for Ikanos to deliver a small-to-moderate opening and a so-so first day." The facts are true and relevant, but ignore that the specific VDSL market Ikanos serves is starting to boom. An article in Forbes is enough to become a self-fulfilling prophecy, however, the kind of unpredictable event that makes stock prices so hard to anticipate.
One investor wrote me "Please continue your due diligence immediately and rethink about correcting your recommendation before its too late. ... You are going to cause people to lose money by buying Ikanos stock.” Heck, I didn't recommend anyone investing in Ikanos - this isn't an investment newsletter, period. I reported buzz (there is) and that the price Ikanos is going public at is appropriate. Only well-financed investors, ready to take major risks, should speculate in any company in this industry. I’m not in that position; if I were, I’d probably buy some, because the Ikanos team have done some remarkable engineering and are in an exploding field. They have 90% of a VDSL market that will grow from about $75M this year to what I’m confident will be $200M to $400M in 2007. The logic that inspires Deutsche to upgrade is compelling in many other markets by 2007. Ikanos has 50% gross margins, and would be highly profitable if their r & d were spread over a larger sales base. The gentleman added a comment that is simply inaccurate. “Ikanos does not have the fully compliant VDSL2 standard and therefore is going to have REAL problems real soon! Big companies like Infineon have the real stuff now, and future orders are going to be fully compliant, leaving Metalink and Ikanos in bad shape.” Almost certainly, no one has a fully compliant VDSL2 standard, although at least three vendors have claimed they do. Testing, especially at the invaluable University of New Hampshire labs, will almost surely discover significant issues. Neither the chip vendors nor the carriers have released any results, which leaves me extremely skeptical the details are resolved. For at least the next six months, and probably much longer, VDSL2 will not be interoperable. A carrier will have to buy DSLAMs and modems with the same brand of chip inside. The investor also noted some companies have a patent position in DSL, but Ikanos has their share of those as well.
Don't forget every vendor in this field is facing tough competition. I reported in the same issue that Infineon held a significant advantage in the German market, compatibility with ADSL Annex B, the German ISDN standard. In the issue before, I noted a big Conexant win. I've reported on TI and others aiming at the same market. Metalink's QAM chips lost out in the standards battle, but they've announced a DMT chip for next spring. David Pereg of Metalink tells me it will be a complete redesign, optimized for VDSL2, and offer better performance. I'm reporting below that Marvell has hired one of the key VDSL chip designers. Broadcom is in for sure, and Centillium has just announced. ADI and ST have yet to declare themselves. Aware reports two new licensees who intend to pair VDSL with network processors. The extreme competition is why I've been skeptical about every company in the field. Ikanos is seeking a fair price and has good prospects, but don't even think of this kind of investment unless you're a sophisticated investor in a position to lose every penny.

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