Sycamore Networks (NASDAQ:SCMR), the long-suffering network upstart, is jumping 25% to new 52-week highs on word that it landed a portion of a Pentagon contract worth up to $900 million, according to Reuters.

Analysts estimated that Sycamore would earn only $40 million in revenue for the current year, and $59 million the year after, so landing a decent slice of this contract, or even a small slice, would be a big deal. It could also help the struggling company regain visibility in the optical digital network market.

Positives aside, it would take a larger piece of the contract than the reported $50 million win to make Sycamore's stock look like a good value. The company has operated in the red since first recording sales in 1999, and has never achieved free cash flow, making one wonder how it merits today's $1.4 billion market cap.

The firm's $230 million in cash and $320 million in short-term investments (with $0 debt) help, and account for 40% of Sycamore's market value, but that still leaves $900 million in share price that begs the "overvaluation" question. (The firm also has $440 million in long-term investments, but those aren't typically included in its enterprise value.)

The cash-burning company is fighting for a toehold in the fierce networking equipment arena during a time when each sale is hard won with price concessions. Revenues at Sycamore were slammed last year and projections are no better the next few years:

  
    2004*  2003   2002    2001   2000    1999Sales $59    $40   $65.2  $374.7  $198.1  $11.3COGS   NA     NA   152.7   317.8   106.4    8.5*For years ended 7/31. Years 2003, 2004 estimated. Numbers in millions.
 COGS is cost of goods sold -- merely product costs.

Even in 2001, when revenue ballooned, the company lost $280 million after paying its R&D costs and employees. Granted, it shut the door on those costs last year, but they're still substantial, especially compared to the fallen revenue. Continued losses are anticipated each of the next few years.

Other reported winners in the government contract -- which is rumored to be a global network for the Department of Defense -- are Cisco Systems (NASDAQ:CSCO), Juniper Networks (NASDAQ:JNPR), and Ciena (NASDAQ:CIEN), although the contract is still only acknowledged by industry watchers (LightReading.com broke this story) and Reuters, not company officials.

The rumor was still good enough to drive Sycamore shares to a new 30-month high. But the bottom line is this: The potential two-year contract, even if it proves out, will not likely put Sycamore's stock close to a decent value. Investors buying today had better have good reason to believe there's much more by way of new sales in Sycamore's pipeline. Much more.