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2HRS2GO: Polycom looks worthy

    It's hard to see a bargain in a narrow niche stock trading near its 52-week high at a multiple of 37.5 times next year's estimated earnings.



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    But who cares? Value investing techniques are almost useless in an environment such as the tech sector, where traders and investors alike focus entirely on growth, growth, growth. And not even bottom line growth, in the case of the Internet sector. In today's tech market, you're not going to find many deals.

    Which makes a stock like Polycom Inc. (Nasdaq: PLCM) about as appealing of a technology investment as you're likely to find nowadays. The maker of conferencing equipment last week reported third quarter earnings of 23 cents per share, easily besting Wall Street consensus of 21 or 20 cents per share, depending on which analyst survey you care to use. Seven of the eight firms following the stock reiterated "buy" or "strong buy" ratings on the stock following the quarterly news.

    While competitors post losses (Picturetel, Nasdaq: PCTL) or marginal earnings accompanied by restatements of prior quarters (VTEL, Nasdaq: VTEL), Polycom is riding a wave of Internet and corporate network expansion that isn't likely to crest anytime soon. The market has recognized that success: shares have more than tripled since reaching a closing low of 13 in late March.

    But with average daily volume of less than 446,000, Polycom isn't exactly a well-known issue either. The gap between recognition and achievement seems especially wide when you consider that other niche communication stocks with more unproven growth prospects -- Phone.com (Nasdaq: PHCM) comes to mind -- have seen their shares jump to the moon.

    Now might be good time to look at Polycom if you haven't already, since shares have dipped on profit-taking since getting a brief jolt from last week's earnings release. Polycom is down more than 3 percent today, and down more than 14 percent since hitting a intraday high of 52 5/16 last week.

    Polycom promises to be a healthy operation for some time to come. The company this year posted year-over-year growth rates of 122 percent, 73 percent and 61 percent in the first, second and third quarters, respectively. As corporations continue expanding their networks and their ties to the Internet, Polycom's videoconferencing equipment will only see more demand.

    Margins continue to rise as Polycom gets more revenue from videoconferencing, says David Karson, analyst with Black & Co. Polycom's third quarter gross margin of 56 percent represents an improvement from 55.3 percent in the second and 50 percent in the year-ago period.

    "The company has a track record of taking on new markets (conference room speakerphones, videoconferencing) and aggressively becoming the market share leader," says Karson, who reiterated a "strong buy" rating on the stock and a set a price target of $150 a share.

    One share for $150? Sounds almost Blodget-like to me, but then again, Henry Blodget turned out to be right about Amazon.com. Besides, even if Polycom gets only halfway there, the stock would have gained 75 percent from today's price.

    The company also hits the right buzzwords with the right partners. Polycom last week signed a five-year deal that puts its audioconference technology into IP-enabled telephones being developed by Cisco. Earlier in the quarter, Lucent decided to carry only Polycom videoconferencing equipment; the two sides also agreed to develop IP products together.

    Deals with the leading telecom equipment and network hardware makers should give Polycom "the rocket fuel to become a major player in the emerging Voice-Over-IP (VOIP) market," Karson says. "Polycom should be able to win a significant portion of the endpoint VOIP business. ... We can not overstate the significance of the Lucent and Cisco press releases."

    Perhaps video and audio conferencing doesn't sound like the most exciting field in the world. But why worry about excitement? Polycom makes a profit, has a solid balance sheet and leads its own little niche of network communications. It's hard to find a better deal than that.

    Other issues:

  • Lucent Technologies
  • (NYSE: LU) The telecom and network equipment gargantuan has its fiscal fourth quarter report scheduled for tomorrow. First Call's survey of 31 analysts predicts a profit of 29 cents per share, but observers will want to hear about the outlook for the next two quarters, especially in light of revenue warnings from suppliers to Lucent's Ascend unit.

  • Lycos
  • (Nasdaq: LCOS) Shares are up today following the Web portal operator's debut of LycoShop, but at least based on my brief experiments using items that I'm actually considering as Christmas gifts for various people, the service seems flaky and slow, not to mention thin on retailers. Shopping for a "coffee grinder" using the "Search" button on the top left corner of the LycoShop home page turns up all of two entries. Repeated searches for "inkjet printer" -- an category which should be easy enough to fill, given the preponderance of computer-related hardware for sale online -- yielded "Sorry, no products were found searching for "inkjet printer". Click here to search the web."

    The "Compare Products" engine produced slightly better results in some cases, but still not as many as I would've expected: just five merchants for "inkjet printer", and two sellers for a popular video game, "WCW Mayhem".

    Lycos is considered one of the more advanced Web portals when it comes to e-commerce. If that's the case, physical shopping malls don't have to worry about losing business to the Web yet.

  • Marc Andreessen
  • I wouldn't be writing this and you wouldn't be reading it if not for Andreessen. He didn't invent the Web browser by himself, but he and Jim Clark were smart enough to realize its potential; Netscape's aggressive promotion and distribution of the Navigator browser helped fuel an explosion of commercial websites such ZDNet.

    Unfortunately, Andreessen's company started believing its own hype while Microsoft seized the browser market; even had Netscape done everything right, I doubt it could have done much to overcome Internet Explorer's operating system advantage. But Netscape also counted on Andreessen and his supposed wunderkind qualities to come up with new products that would turn his company into a giant.

    He didn't come up with anything original. Netscape's server software couldn't win huge market share against the free Apache, while groupware made little headway against Microsoft and Lotus. Netscape eventually found its best profit potential to be in its website, a business Andreessen dismissed long enough to let the likes of Yahoo! establish brand leadership in the portal space.

    Now he wants to try application hosting, which isn't exactly a new idea either; just ask Larry Ellison or Lou Gerstner. Andreessen's new team includes some Netscape veterans -- not encouraging, given Netscape's failure despite first-mover advantages. Maybe Andreessen -- really just a one-hit wonder so far -- needs not a new start immediately, but a sabbatical, to refill the idea tank. 22GO>