This article outlines how the stock of Ikanos, priced below
$2, could realize explosive growth on the next wave of VDSL
technology and grow earnings close to $1 per share over the next
) is a fabless manufacturer of xDSL semiconductors. xDSL flavors
consist of ADSL, SDSL and VDSL. The primary flavor of xDSL of
concern for Ikanos's future prosperity is called "vectored VDSL."
Vectored VDSL cancels the crosstalk between pairs of copper wires
and enables bandwidth of up to 100Mbs with existing copper wire
pairs. This is the DSL flavor that telephone companies across the
globe will deploy to remain competitive with high-speed
capabilities of competitive cable systems while also providing
viable economics compared to fiber-to-the-home (FTTH). The reality
for telco companies is that 50Mbps-or-higher is becoming a
necessity for the chorus of applications sucking bandwidth from
today's residential connections: video-on-demand, HDTV,
over-the-top applications such as Netflix (
), and web surfing in the world of "I want it now."
Ikanos is perfectly positioned for the deployments of
vectored VDSL over the next 18 months.
Why Vectored VDSL is Inevitable for Telco
The US is rich in cable company infrastructure. The media also
trumpets the growing use of wireless and fiber broadband
connections. But the global facts are as follows:
- Cable companies will continue to prosper and have an inherent
bandwidth advantage over telco infrastructures. But telco
companies will simply not allow their networks to shrivel away.
They will invest in their existing networks to be able to offer
services that are competitive to cable companies.
- Much of the world residential broadband connections are still
dominated by telcos and DSL. According to Q1 2012 statistics, 60%
of the global broadband connections are slower ADSL and 14% are
FTTX where the last leg of the connection is typically VDSL
(source: Ikanos corporate presentation, Point Topic Global
Broadband Statistics Q1 2012).
- There are about 1 billion lines of copper in the world
(source: Ikanos corporate presentation). A significant portion of
these are ADSL lines and will likely be upgraded to vectored
VDSL. Europe and certain large North American carriers are
particularly ripe for this upgrade wave.
- While telcos have deployed FTTH, it has become clear to the
telcos that FTTH is very costly to deploy at about $1,300 per
home (source: AP article, 2010). VDSL on the other hand allows
the telcos to deploy broadband lines for about $250 per home
(source: Ikanos corporate presentation). This trend is clear from
Verizon's wind-down of its FIOS in early 2010.
- While broadband wireless access is great for cellphones and
laptop / tablet access, the bandwidth is simply not high enough
(15 Mbps for LTE) to be a primary broadband residential that can
carry video, internet and voice.
Sizing Up the Forthcoming Vectored VDSL Market
The following table shows a projection of the vectored VDSL
market (source: Ikanos corporate presentation). The chipset market
opportunity is based on a $15 average selling price for both sides
of the wire (which is conservative to Ikanos's own projection of
Vectored VDSL Line Installed (millions)
Chipset Market Opportunity (millions)
The skeptic will correctly point out that the table is likely
skewed to the optimistic side of things since it is Ikanos's own
But even if the rollout projection is off by 10 million lines
in 2015, the market opportunity is still 4 times bigger than
Ikanos's current revenue of $120mm.
How Can One Be Certain that Ikanos is the Right Horse to
The world was certain Apple (
) stock was headed to $1,000 when it was priced at $700. The stock
is now in the low $400's. Even the smartest guys in the room had a
convincing argument for Apple being worth $1 trillion ($1,000 stock
price). The point of the Apple story is that there is never
certainty in investing. Investing is a game of capitalizing on
risks that are asymmetrically skewed to one's favor.
The investment risk / reward on Ikanos stock is skewed heavily
towards the reward side of the ledger.
The company currently has a market capitalization of about 1 times
revenue. This is close to "salvage value" for a company that has
generated almost 50% gross margins in its fourth quarter of 2012
and is pumping $50 million annually in R&D for DSL.
But the upside for the stock is apparent in that if Ikanos only
gets 30% market share of the $600 million vectored VDSL market
opportunity in 2015,
the company would almost triple its revenue to $300 million and
earn close to $1 per share.
(This is based on 50% gross margins and the company's current
operating expense level of $80mm annually and 70 million shares
While Broadcom (
) has leading market share for VDSL, Ikanos is laser-focused on
outflanking Broadcom with its innovation called Nodescale Vectoring
VDSL that provides an extremely elegant technology for
noise-cancellation with vectored VDSL. The only other competitor,
Lantiq, had debt rated by Moody's below "high speculative." This
does not instill a great deal of worry about the company as a
competitor to Ikanos. Ikanos's Nodescale Vectoring is currently in
lab trials with Tier 1 carriers (source: Ikanos company
presentation) and, based upon positive results, could enter field
trials in the middle of this year. Deployment could start to
trickle in towards the end of 2013.
Evidence of Ikanos's credibility with telco carriers is
illustrated with their recent success with vector-compatible
chipsets for CPE which are being installed in homes prior to
wide-scale carrier deployments of vectored VDSL. In the most recent
quarter, Vx17X, Vx18X Fusiv communications processors were 37% of
total revenue. These processors are used in CPE equipment such as
the Orange Livebox 3.0 in Europe and are field upgradeable to
Getting Invested Before the Turn
How many times in investing does one hesitate to buy a stock
because it is "too early" only to fail to buy once the chart has
turned on the stock, "waiting for a pullback?" One of the key
tenets of investing is that the best investment returns come when
the positive events are just far enough out for Wall Street to
ignore. With Ikanos, the opportunity is positioned as such.
Vectored VDSL rollouts will not occur in large scale until 2014
though Ikanos recently stated that the company could become
profitable before the end of 2013 on its initial success in this
area (source: company presentation at Roth Capital Partners Growth
Conference). The company has also communicated in its fourth
quarter conference call that its business will be a tad soft in
first two quarters of 2013 due to digestion issues with a couple of
carrier end customers that are deploying its Fusiv family of
processors. This patch of softness provides a compelling entry into
the stock given that 2013 estimates have now been reduced while the
ramp of vectored VDSL is just at the horizon.
The risk / reward opportunity and timing of Ikanos are almost
perfectly set up for a potential multi-bagger while the downside is
limited. There are few other investments in the technology sector
where the smartphone market is maturing, PC shipments are shrinking
and green energy is in need of a breakthrough innovation. Quite
simply "the time is nigh" for Ikanos.
I am long [[IKAN]]. I wrote this article myself, and it expresses
my own opinions. I am not receiving compensation for it. I have no
business relationship with any company whose stock is mentioned in
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