Sycamore Networks makes spectacular US IPO debut

Sycamore Networks' IPO was expected to be huge, but the opening trade of 270 7/8 may have shocked even the most optimistic market watchers.

Shares sank throughout the day to close at a "mere" 184 3/4, for a one-day gain of 146 3/4, or 386 percent. But the IPO shows what can happen when a company with a hot technology goes public with the market headed in the right direction. The optical networking equipment provider nearly doubled its price range to $35 to $37 from its previous range of $18 to $20. Sycamore priced 7.5 million shares at $38 Thursday night. Morgan Stanley was the lead underwriter.

By all accounts, analysts were expecting a big debut. And Sycamore didn't disappoint. Not bad for a company that was in the development stage until May when the company shipped its first product. The company has lost $20.2m (£12m) since inception and has one customer, Williams Communications. "It's a great company, but a $14m market cap is unbelievable," said Francis Gaskins, editor of the Gaskins IPO Desktop. He admitted there's a big need for Sycamore's technology, but didn't think that it merited such an outrageous run-up.

But according to some analysts Sycamore is worth it. Most analysts wouldn't speculate on valuation for Sycamore, but did say its technology was more than just hype. "It is a huge market," said Ken Fleming, an analyst at Renaissance Capital's IPO Plus Aftermarket Fund. "Sycamore is really trying to revolutionize the way networks operate."

Sycamore is selling high-end equipment. It only has one customer, but Williams was good enough for $11.3m in revenue for the quarter ending 31 July. The company's products transports voice and data traffic over wavelengths of light. Current equipment converts optical signals into electrical signals and then converts it back. All those conversions increase network complexity and costs and gives Sycamore next generation market to chase. If Sycamore's products squeeze more capacity out existing fibre optic networks, the company will be on to something.

The company, headed by Cascade Communications and Ascend Communications alumni, has three of nine planned products commercially available. Craig Johnson, an independent analyst with the PITA Group, said Sycamore could be a big networking player. "The technology is really interesting," he said. "It's smart light switching and has the best of ATM with the best of routing." It's a complete package. Johnson also said Sycamore's optical networking focus is on target -- networks will be run by that technology in two to five years.

Indeed there is some competition, Ciena, Lucent Technologies and Nortel are chasing the same technology, but have to worry about compatibility and other products. If Sycamore's hype-to-reality ratio is about a year, Lucent's and Nortel's could be about two years, said Johnson.

Analysts said Sycamore has a head start on the big guys and can focus on its main product. It will take Lucent a good year or two to get a competing product on the market.

Reuters contributed to this report.