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They used to call it dark fiber…
It was the 1990s. Telecom firms plowed billions into fiber optic networks to prepare for the coming explosion in traffic for the web, wireless systems, and computer networks.
Turns out, the supposed "gold rush" was just a few years ahead of its time. So, much of the fiber optic systems sat unused. They were quite literally dark – no light, no data, was shining down the high-speed cables.
But quietly over the past few months, the fiber-optic sector has hit critical mass.
It's lit up like never before.
Consider that one small-cap leader has already handed savvy broadband investors gains of nearly 300% over the past year.
And with a market cap of just $342 million, the fast-moving stock still has plenty of room to run.
In a moment, I'll show you just what I mean…
First, we need to look at the big trends pushing this and other fiber optic stocks into the stratosphere.
Time to Invest in "Ultra-Broadband" Just Like Google
Simply stated, we have entered the era of ultra-broadband technology.
What that means, for users and investors alike, is that network demands are growing exponentially. And suppliers are scrambling to meet the need for higher bandwidth.
No less an authority than broadband supplier Cisco Systems Inc. (Nasdaq: CSCO) notes that Internet traffic has doubled every year for the past five years. And much of that data, voice, and video travel over fiber optic cables for at least a portion of the journey.
Several factors are pushing broadband needs like never before, Cisco and industry analysts note.
Let's start with the tidal wave of video demands brought on by YouTube, a unit of Google Inc. (Nasdaq: GOOG). YouTube reports that roughly 100 hours of video are uploaded to its servers every minute of the day, and that people watch about 6 billion hours of video a month.
Netflix Inc. (Nasdaq: NFLX) is a broadband provider's dream come true. The online video streaming service counts roughly 26 million customers, who watched roughly 1 billion hours of video in the month of June alone.
And these numbers don't count the millions of hours of corporate video that companies are hosting on their websites.
Neither do they account for what's happening in the TV industry, where broadcasters are gearing up for ultra-high-definition (UHDTV) sets. These are TVs that display images at roughly four times the resolution of today's high-def technology. That means they will soak up bandwidth like never before.
All this is occurring as the demand for web-centric smartphones and tablets is putting huge strains on wireless networks, which also use fiber optic systems.
Welcome to the Internet of Everything…
7 Trillion Sensors, Working Together
Consider that Google says it has activated more than 900 million devices using its Android operating system. Each day it adds roughly 1.5 million handhelds to the world's wireless networks.
Throw the Internet of Everything (IoE) into the mix, and you have years of pent-up demand for ultra-fast networks. As the name implies, the IoE means connecting nearly every physical object in the world to the Web.
Cisco says by the end of this decade some 50 billion devices will be on the IoE, and the number will quickly grow to 10 times that amount. And the giant German firm Bosch predicts that, by the time it's all said and done, we'll see some 7 trillion sensors transmitting data to the IoE.
Now you know why the broadband industry is building out networks to deliver a 10-fold increase in capacity from today's pipes, now more than a decade old.
We're talking about 100-g networks. That means the systems can deliver Web content at 100 gigabits per second – roughly 200 times faster than what most consumers have at home these days.
All of which puts optical networking firms front and center. Then again, when it comes to raw speed, nothing beats light.
Enter Alliance Fiber Optic Products Inc. (Nasdaq: AFOP). Basically, Alliance helps make fiber-optic technology possible for homes and businesses.
These Shares Are Unstoppable
The company builds optical networking components, modules, and subsystems needed by long-haul carriers as well as those who connect what's called the "last mile" from the network to your home.
Ironically, if ever there was a dark fiber bust it was Alliance. Riding the original Internet wave, the stock traded as high as $27.65 a share in February of 2001.
Then the dot-com bust cut the legs out from under the stock. By October of 2002, AFOP shares were trading for $0.97 each.
Today, however, Alliance has become an unstoppable force on greatly improving profits and cash flow. In fact, the company has raised guidance several times this year.
That's why Alliance has gained roughly 300% over the past year and has turned in a 785% gain over the past five years.
Demand for the stock has been so intense the company recently split two-to-one – and the gains reflect the split-adjusted prices.
With a market cap of about $320 million, the stock trades at a post-split price of less than $18. Alliance has excellent financials, as well. It boasts a 24% profit margin, and a return on equity of 20.6%. It has $38 million in cash, and no debt.
Aside from the market's chaos brought on by Washington's budget battles, the main short-term risk remains possible shareholder dilution.
Later this month, the company will host a special meeting in which one of the proposals is to increase the number of authorized shares to 100 million from the current 20 million.
Let me be blunt. Yes, I see risk in more shares trading. But that will be greatly reduced by institutions snapping up shares, which I believe will be the most likely outcome. They currently hold less than one-third of the stock, and all indications are they want to own more of it.
I don't expect the firm to issue all its new shares at once, either, unless it has lined up buyers who will take them without asking for a substantial discount.
Either way, there's no denying that Alliance and other firms in the sector will continue to face explosive demand for their products as the world moves to ultra-broadband technology.
About the Author
Michael A. Robinson is one of the top financial analysts working today. His book "Overdrawn: The Bailout of American Savings" was a prescient look at the anatomy of the nation's S&L crisis, long before the word "bailout" became part of our daily lexicon. He's a Pulitzer Prize-nominated writer and reporter, lauded by the Columbia Journalism Review for his aggressive style. His 30-year track record as a leading tech analyst has garnered him rave reviews, too. Today he is the editor of the monthly tech investing newsletter Nova-X Report as well as Radical Technology Profits, where he covers truly radical technologies – ones that have the power to sweep across the globe and change the very fabric of our lives – and profit opportunities they give rise to. He also explores "what's next" in the tech investing world at Strategic Tech Investor.