A View Of the NY Technology Ecosystem

I recently was interviewed on Bloomberg TV to talk about the NY Technology Start-Up Ecosystem.  The interview can be seen here.   The quick summary points of the interview are as follows:

1.  While the media/press like to compare NY to Silicon Valley in terms of technology venture capital and start-ups, the comparison is probably not appropriate.  The Silicon Valley technology ecosystem began decades ago (with major milestones like the HP IPO in 1957, Intel IPO in 1971 and the Apple IPO in 1980), while the NY technology ecosystem is likely only about decade or so old.    Even so, NY ranked second only to Silicon Valley in terms of total technology venture funding and private company M&A among all major cities in the US in 2012.  Clearly, NY has enormous momentum.

2. The NY technology start-up ecosystem is developing very favorably with many successful financial exits in the past few years (e.g. Buddy Media, OMGPop, Tumblr, MakerBot, etc.).  NY has made tremendous strides in the past decade to be viewed as a place for talented entrepreneurs, engineers, venture capitalists and academics to work.  The positive impact of Mayor Bloomberg over this period has played a key role to the development of the NY Technology community and I hope the next mayor can continue the momentum.  We are also seeing homegrown venture capital firms like Union Square Ventures, FF Venture Capital, Bowery Capital etc. be an integral part of the technology community in NY.

3. A key part of the development of the NY Technology ecosystem in addition to government policy and homegrown VCs is the support of local universities for technology entrepreneurship.  We have seen increased awareness and actions by major universities locally like the entrepreneurship efforts of Columbia University and the development of the Cornell Technology campus at Roosevelt Island.  A key part of the development of Silicon Valley over the past several decades was the pro-active efforts of Stanford University to foster and promote entrepreneurship among its students and professors.  NY universities like Columbia have dramatically improved their efforts and policies towards entrepreneurship in the past several years and have implemented best practices policies towards entrepreneurship.

4. While NY is now number two behind Silicon Valley in technology venture investing, longer term it will likely be important for NY to have its own natural consolidators that are created and grew in NY.  Shutterstock, which went public in 2012, is an example of a successful IPO of a NY technology company.  Over the next decade, it will likely be better for the development of the NY technology ecosystem if other companies IPO and grow as public companies rather than NY being mostly a satellite city for traditional larger technology companies (e.g. the acquisition of NY based Tumblr by Silicon Valley based Yahoo).   While having Google, Microsoft, Yahoo, Twitter etc. open up offices in NY and seeing NY technology start-ups be acquired at healthy valuations by non-NY technology companies is great for now, longer term, I believe the broader success of NY as a technology center would be advanced if the region had its own natural consolidators.

Capex Continues Its Slow Drift Upwards

Following up on my most recent post on July 8th, I continue to see a slow but steady drifting upward of both telecom and networking capital spending.  An increasing competitive environment in the US wireless industry, the likely ramp of LTE spending in China in 2014 and the beginning signs of telecom spending bottoming in Europe should support service provider centric communications equipment stocks. In addition, while enterprise centric IT spending has not shown as vibrant of a recovery, recent results from distributors and other supply chain companies are starting to point to a recovery in enterprise networking spending.

Stocks that I have liked and continue to like in this current environment are Cisco, Alcatel-Lucent and JDSU.  While I continue to like all three of these names, I think the potential returns from current levels are not as significant as the respective returns over the past year. Specifically, I am looking for returns of 10%-20% over the next several months to year for both Cisco and JDSU, while ALU may have a bit more upside, yet with more risk as well.

Both Cisco and JDSU report earnings this week.  Wall Street is generally looking for Cisco to report results that are slightly better than consensus estimates, while there is a mixed view on JDSU going into its earnings.  The overwhelming consensus that Cisco will report a slightly better than expected quarter is a bit concerning as there seems to be little controversy going into results as compared to prior quarters. Thus, expectations are generally positive for Cisco, which leaves little room for any disappointment in their results. Even so, however, most signs seem to be positive for Cisco going into its results, including positive data points from its supply chain in 2Q results (e.g. distributors, contract manufacturers etc.), the continued strength in telecom capital spending in the routing area (as witnessed from both ALU and Juniper results) and a generally improving IT spending environment.  In addition, Cisco will be reporting its fourth fiscal report when it reports this week, which is generally a strong bookings quarter for Cisco.   This should support a solid year end backlog when results are reported.

With regard to JDSU, there is a mixed view going into their results, as most of its peers in the test and measurement business (e.g. Ixia, Spirent etc.) reported disappointing results.  On the other hand, optical component suppliers (e.g. Finisar, Alliance Fiber etc.) have generally reported (or pre-announced) positive earnings results.  Thus, there is more uncertainty around JDSU’s upcoming results and guidance.  My sense is if JDSU does offer either disappointing results and/or guidance, Wall Street will look at it as a buying opportunity as both these business segments are likely poised to improve in 2H13.

For my recent views on the security market post Cisco’s acquisition of Sourcefire, check out the following link.

Disclosures: I am currently long Alcatel-Lucent, Cisco and JDSU.  NT Advisors LLC may in the past, present or future solicit consulting business or have generated consulting business from any company mentioned in this post.