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Applied Micro Circuits: Fiber Optic Leader

Don't Count Out Fiber Optics

Economic slowdown or not, fiber optics is not going to disappear into a puff of smoke. Sure telecommunications spending will be curtailed for the intermediate future, but investors need to look at the big picture when it comes to fiber optics. The technology is the ultimate transportation vehicle of the broadband industry and the pervasiveness of the Internet will continually push the need for ever faster data connections.

Among the companies that have been punished within this sector, but still possess the potential for tremendous upside over the long-term is Applied Micro Circuits {AMCC}. The company provides silicon solutions to power the world's optical networks. AMCC's primary competitive advantage is in its germanium chips, which can operate at higher frequencies than regular silicon and at lower power levels than ultra-high speed gallium arsenide integrated circuits. These chips appear in products from high-profile customers such as Nortel {NT} (its largest customer), Cisco {CSCO}, JDS Uniphase {JDSU}, 3Com {COMS}, Alcatel {ALA}, and Lucent {LU}. Although these blue-chip technology customers previously helped AMCC's revenues and market cap to price soar into rarefied air (annual sales of over $400 million and a market value over $30 billion at one time), these same customers have also caused AMCC to plunge, due to the tough economic environment.

Looking Forward

As mentioned earlier, Applied Micro Circuits is positioned to continue as a leading chip supplier to the fiber optics industry due to its innovations with an ascendant semiconductor material such as silicon germanium and the market leadership of its customers. Furthermore, Applied Micro Circuit's fiscal strength may allow it to pick up market share from weaker competitors who might not survive these tough times. The company has been profitable for four consecutive years (excluding one-time charges), has approximately $1 billion in cash, and has a customer list that is hurting but is in no real danger of going under. Although AMCC continues command quite a premium (12 times sales), investors may want to consider researching the stock further because Applied Micro Circuits is likely to shine again once the economy recovers because of its powerful market position in the ascendant fiber optics industry.