Foundry Networks Surges After IPO, Is It Worth It?

(Reuters) - At the end of Foundry NetworksInc. first day as a publicly traded company, with just $17million in 1998 revenue, the data networking concern had a marketvaluation of $8.

(Reuters) - At the end of Foundry Networks Inc. first day as a publicly traded company, with just $17 million in 1998 revenue, the data networking concern had a market valuation of $8.69 billion.

Not bad for a company founded in May 1996 and that first turned a profit for the six months ended in June of $3.27 million, or 8 cents a share. The stock rose $131.25 to $156.25 Tuesday, making it the second-best performing initial public offering ever.

Initial public offerings of companies that make the Internet's plumbing, such as networking, are now in vogue rather than the e-commerce offerings of Spring. But is Foundry -- and others like it -- even worth that much?

``Wall street was enamored with e-commerce stocks and now they're enamored with Internet infrastructure companies,'' said analyst John Armstrong at market researcher Dataquest. ``These types of gains certainly prove the illogic of the market.''

Foundry is More than just the latest hot Internet-related company to tap the public markets. It is a rarity: It's already made a profit. For the six months ended June 30, it had net income of $3.27 million on sales of $39.5 million.

Foundry, which competes with networking kingpin Cisco Systems Inc. and other far larger firms such as Nortel Networks and Alcatel SA of France, for the moment has a competitive edge, analysts said, because it has developed very high-performance but low-cost switches.

``They can deliver really high-performance products at a lower cost,'' Armstrong said.

Foundry counts among its customers America Online Inc., Hewlett-Packard Co. and others. Its products are also popular with Internet service providers. Sales, growing at more than an 800 percent rate, are expected to reach $79 million this year, said Irv DeGraw, research director at

Analyst Paul Sagawa, of Sanford Bernstein, while declining to comment specifically on Foundry, said it would be surprising if all the start-ups in the networking industry were worth the staggering market valuations that they're accorded.

``I would suggest that better growth rates would tend to be in the carrier space and you always have a tough road ahead of you when Cisco is a dominant player,'' Sagawa said.

Foundry, which sold a 9 percent stake in the IPO, had already nearly doubled the expected price range of the shares to $22-$24 from $14-16, a sign of strong investor demand.

The stock opened at $90 and climbed steadily. By the end of the day, it nudged out Inc. for the No. 2 spot as the best-performing IPO ever in percentage terms, accord to Securities Data Co. soared 364 percent on its first day of trading after selling shares at $14 each.

The Inc. still holds first place, with a 606 percent gain after its November 1998 IPO.

For the six months ended June 30, Foundry had net income of $3.27 million, or 8 cents a share, compared with a loss of $4.23 million, or a loss of 27 cents a share. Revenue rose more than nine times to $39.5 million from $4.2 million.

Deutsche Banc Alex.Brown managed the offering, assisted by Merrill Lynch & Co. and J.P. Morgan & Co.

Analysts said there will certainly be more IPOs in the networking industry, as Internet traffic continues to surge and estimates of online commerce reach trillions of dollars.

And with these kinds of gains, companies are tempted to return to the well for more.

Juniper Networks, which makes high-speed routers used to shunt data back on forth on networks, on Sept. 1 filed for a proposed offering, only two months after going public. Juniper said it would offer 1.5 million shares, while certain stockholders would offer 3.5 million shares.