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Networking newcomers leave old-timers in the dust

Given the market popularity of firms like Extreme and Foundry, it seems that for investors and some networking customers, the latest-and-greatest is much more enticing than the tried-and-true.

    Cabletron Systems chief executive Piyush Patel can only look at the valuations of upstart networking competitors Extreme Networks, Foundry Networks, and Alteon WebSystems and shake his head.

    Cabletron is celebrating its tenth year as a publicly traded company in one of the hottest portions of the technology market: Net-based networking equipment. Yet the newcomers are reaping the spoils of a stock market obsessed with everything Internet.

    More fuel will be added to the fire this week. Extreme is expected to announce the results of a prosperous quarter tomorrow, while high-end start-up Sycamore Networks is scheduled to go public soon.

    Thus Cabletron is surprisingly left with a market capitalization nearly half the size of Extreme's, which went public in April, and a third of the size of Foundry, which went public last month.

    Why the discrepancy? To be sure, veteran firms like Cabletron, 3Com, and Newbridge Networks have come up short on earnings, gone through a few management changes, and grown at a slower-than-expected pace of late. But it seems that for investors and some networking customers, the latest-and-greatest is much more enticing than the tried-but-true.

    "It's the shiny-new-thing theory and an indication of how interested people are on the Internet," said Bill Flanagan, program director of industry consulting firm NetReference. "3Com and Cabletron have proven what they can do. They're not as exciting as the unknown."

    Others believe that a track record isn't valuable currency in the current market for networking stocks--unless, that is, you happen to be Cisco Systems.

    "The market goes after growth and growth potential, and they see that Cabletron and 3Com have been at it for a while," said Argus Research networking analyst David Toung. "They've missed numbers on a few quarters and their inconsistency causes some concern. For investors, if you've been around for many years and have a track record, they can judge you by that."

    Foundry, Extreme, and Alteon build high-end switching devices for computer networks. Foundry now claims a market capitalization of $7.8 billion, while Extreme is now worth $4 billion. Alteon's market cap stands at around $3.2 billion.

    In contrast, numbers for 3Com, Cabletron, and Newbridge aren't as impressive, even though they make the same type of equipment and have a more diverse product portfolio.

    While 3Com's market cap is $9.6 billion, its stock has been mired in the 20s since the summer. Cabletron's market cap is a paltry $2.7 billion while its stock hovers around $15. It's the same story for Newbridge, valued at $3.8 billion.

    On the other hand, high-flying Juniper Networks, a maker of an industrial-strength routing device that went public in June, has already achieved a market capitalization nearly equal to 3Com and Cabletron combined.

    The booming market is of little solace to Cabletron's Patel, who could have been part of an IPO had he not sold his company, the former Yago Systems, to Cabletron last year.

    "Foundry's [valuation] is obscene," said Patel, adding that Cabletron's revenue is three to four times higher than Foundry's.

    Patel said he's hoping the networking success stories will drive more investor interest in networking firms in general, and in turn, help boost Cabletron's stock price.

    "It's good for the industry," Patel said, referring to the success of his younger rivals. "I think start-ups tend to have a sexier story, but it can only help Cabletron."