Paul Johnson

Analyst, Robertson Stephens

CATEGORY: Communications Equipment

STOCK PICKS: Sonus Networks (SONS), ONI Systems (ONIS), Extreme Networks (EXTR)

Paul Johnson
Remember how the first PCs cost almost as much as a car --and weighed nearly as much, too? People certainly get more for their money these days. That's because the amount of computing power one can buy with a dollar doubles every 18 months. "That phenomenon, known as Moore's Law, is about to enter the telecom world," says telecom-gear analyst Paul Johnson of Robertson Stephens. Johnson thinks the coming change will define the new winners in the communications-equipment field.

Johnson counts Sonus (SONS ), ONI (ONIS ), and Extreme (EXTR ) among them. He has "buy" recommendations on all three and expects substantial jumps in their stocks in the months ahead. He doesn't put out specific price targets, but he thinks the shares of all three could rise fivefold over the next three to four years. Today, ONI trades at $32.55, Sonus at $27.35, and Extreme at $29.65.

The trump card: Each makes equipment that telecom companies need to stay competitive while lowering costs. For example, ONI's gear, which turns information into light and carries it across local phone networks, provides just as much capacity as rivals' products at half the price, Johnson says. That's because ONI's gear uses smaller parts that are scalable, require less maintenance, and consume less power than traditional gear. Its equipment is also easier to use: Using ONI's gear, a telecom can allocate extra bandwidth to one customer with a few clicks of a mouse. With most rivals' equipment, carriers must send staffers out to the customer's offices.

Sonus directs voice calls with routers based on Web technology rather than more expensive traditional phone gear, lowering operating costs by 20% or more. Extreme makes next-generation, modem-like devices that let carriers sell 100-megabit Net connections for $1,500 a month--less than one-fourth the price rivals have been charging. "Carriers must lower costs, and they will reward suppliers who help them get the job done," Johnson says.

Paul Johnson

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