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No get rich quick scheme here, but man, could we make a lot of dough!
by Briton Ryle
The American Dream: hard work, saving, and investing for retirement — or get rich quick schemes that end in misery? My guess is the latter. The irrational and intoxicating belief that fabulous wealth is there for the taking has a chokehold on American society.
Call it what you want: lotto fever, Regis-envy, etc., the answer to "Who Wants to be a Millionaire" is always the same: me. After all, the United States is the Promised Land, the shining castle on the hill. And the hoi polloi believe they should be living like kings within the shining walls.
Easy money is a fantastic but harmless delusion. Until it becomes a national obsession. Hundred-million dollar, multi-state Big Game jackpots, prime-time game shows, stocks and (spurious) tobacco lawsuits are all examples of how entrenched and twisted the whole personal wealth construct has become.
A curious blend of egotism and slothfulness makes the easy money scenario seem plausible, even tangible (despite overwhelming evidence to the contrary). For starters, we irrationally believe we can conquer any situation, regardless of experience or skill. Add to this the belief that our innate and undeveloped talents entitle us to the good life, and you've got all the makings for a colossal modern tragicomedy.
The envelope please...
My personal Academy Award goes to that group of greedy, neo-romantic egomaniacs who agreed to be marooned on a desert island and compete in stylized primitive contests for the chance at a big payoff, all to the squealing delight of an utterly immature American television audience.
Of course, I'm speaking of CBS's hit show Survivor, the game show that manages to bridge the gap between Ernest Hemingway and Gilligan's Island. I nearly made it through two entire episodes, but a queasy stomach finally got the best of my curiosity.
Wall Street Survivor
Until March of this year, tech stocks were livin' large in their own little tropical paradise. Just the hint of "optical" or the whisper of "wireless" sent stock prices soaring. And then a strange thing happened: techs started getting kicked off the island. The dot-coms were the first to go. Investors finally figured out the zero-sum Internet business plan and voted no. Amazon (AMZN:NASDAQ) and Dr. Koop (KOOP:NASDAQ) are two notable dot-coms now well off their highs. Next to be sent packing were the B2Bs, with Internet Capital Group (ICGE:NADSAQ) and Commerce One (CMRC:NASDAQ) getting whacked.
Then wireless got the boot. Starting with Qualcomm (QCOM:NASDAQ), skepticism tainted the outlook for Motorola (MOT:NYSE), Ericsson (ERICY:NASDAQ), and even my beloved Nokia (NOK:NYSE). Competing standards, expensive license auctions, and even doubts about the availability of spectrum brought about the downgrades. Of course, growth numbers are still very impressive, but the easy money picks have backed off just a bit.
At the very heart of wireless is the semiconductor. The ultimate picks-and-shovels play, semis have been hit by doubts in recent weeks. LSI Logic (LSI:NYSE) got absolutely creamed. Notable exception status goes to Intel (INTC:NASDAQ) and Broadcom (BRCM:NASDAQ).
Then there was one
The wireless sector provides some good examples of how expectations get ahead of reality. Take Motorola. Analysts hoped to see 100 million phones sold in fiscal 2000. Motorola said the same thing, but then they told analysts that 80-85 million phones was more realistic. The revision, or clarification, sparked a near panic, even though 80 million phones represents a 60% increase in phone sales. Motorola has not revised earnings per share or net margins.
Nokia also got nailed when they estimated third quarter profit margins will shrink, despite the fact that Nokia grew revenues by 55% and gross margins hit 39% in the second quarter. Does this justify a 25% drop in valuation? Obviously not. But the stock market overreacts sometimes. And when you're shooting for the moon, anything short is a failure.
The fiber optics industry is the last tech on the island, the sole survivor. Nobody's stabbed holes in bandwidth demand numbers. Yet. Though I'm sure analysts will try. Not out of spite, or any insider plot to bring prices in the optical sector down so they can load up. But simply because there's a massive re-thinking of tech valuations going on.
Everyone says the market looks 3-5 years out. Clearly that's a bunch of hooey. Sometimes the market is unsure and shortsighted, and that makes for a great opportunity to pick up quality stocks at a discount.
Gotta stay focused
Getting back to the point, optical stocks are the last ones on the island. To be sure, expectations are high for the sector. Leaders like JDS Uniphase (JDSU:NASDAQ) and Corning (GLW:NYSE) carry high valuations that reflect investor optimism. And the IPO market for optical companies is smokin'. Just look at the recent debuts of Corvis (CORV:NASDAQ) and Avici (AVCI:NASDAQ). Corvis now carries a US$35 billion market cap and it hasn't sold a damn thing. Zero. Zip. Nada. And losses topped US$70 million for the last fiscal year. Avici seems the better value with a US$7 billion market cap and US$2 million in revenue for the just completed second quarter. Did I say value? Based on these two examples, the optical sector is due for a re-rating.
I've recommended a couple of small cap optical companies in the past, with results that were, well, not all I would have wanted. This month, though, I have an optical company that sports a US$3.5 billion dollar market cap. But as you'll see, this valuation represents a true bargain in the space.
The optical incubator
Until we get out from under interest rate hikes and tech revaluations, it's best to concentrate on the established players. And I think I've found a truly undervalued optical company in MRV Communications. I've been watching this one for a while, but it's only now that I think the company is really ready to reward its stockholders.
MRV is an incubator, much like Internet Capital Group or CMGI, with one big difference. After MRV IPO's one of its babies, it plans on distributing shares to stockholders. And as you'll see, this could be a windfall for investors, though I'm not promising we'll get rich quick.
MRV did US$288 million in sales for fiscal 1999, which means it sells for just 12x sales. Sounds like a lot until you consider that JDS Uniphase sells for close to 60x sales. Comparisons with JDSU don't end there. MRV's first IPO, Luminent, will be only the second company in the world, after JDSU, that sells and manufactures passive and active components for optical systems. For a more detailed discussion of Luminent products, please see Sui-Yee's IPO article in this issue.
You'll see MRV called an optical incubator in the press, but it's much more than just optics. MRV runs the gamut of networking products, from wireless last mile coverage to terabit routers and network management products.
The IPOs
Luminent is the result of several acquisitions. Its products include thin film and fiber-Bragg grating filters for DWDM (dense wave division multiplexing), WDM couplers, attenuators, add-drop multiplexers, detectors, transmitters, laser diodes, and transceivers for single-mode fiber optic transmission. In a nutshell, Luminent can create the beam of light and the components to move the beam around the network.
Luminent is profitable, a rarity among optic IPOs, earning US$4 million on US$65 million in revenues last year. Revenues have already hit US$43 million in the six months since December 1999. The US$207 million IPO will probably involve 12 million shares offered in the US$17 range. MRV will then hold 80% of Luminent stock, which it plans to distribute to MRV stockholders within 6 to 12 months of the IPO. MRV currently has 57 million shares outstanding, and holds 144 million shares of Luminent. That means the distribution ratio should be 2 shares of Luminent for every share of MRV. Not bad.
Now, we all know that stock is very rarely sold at the IPO offer price. How would the venture capitalists make money if the average Joe got the same deal? At US$17 bucks a share, Luminent will carry a US$2.5 billion market cap. Remember, MRV's market cap is only US$3.5 billion. I think there's a good possibility that Luminent will exceed MRV's valuation.
Number two
Following quickly on the heels of the Luminent IPO will be the coming out party for Optical Access. If you ask me, this one's gonna be the blockbuster. Optical Access has a very compelling last-mile solution. In case you didn't know, "last mile" refers to the link between a telephone company central switching office and your house. DSL is one solution for bringing megs of data to the home, as is fiber-to-the-curb. But both solutions have one thing in common: cost.
Any company can offer DSL service, but they have to lease space from the phone company. And running fiber links to every home is still prohibitively expensive. Optical Access provides a solution that lets service providers bypass the phone company without the
expense of bringing fiber to every home. It's called
wireless optical.
The idea is to run fiber from the nearest network ring to a central point and then wirelessly transmit data to the end user. Of course we've heard this idea before. AT&T has been testing wireless data for over a year, with very poor results. But MRV and Optical Access have overcome many of the problems that have plagued AT&T and others.
For starters, Optical Access can cover two miles with data rates as high as 155 mbps. But what makes this solution feasible is the mesh architecture it employs. Mesh architecture allows the datastream to saturate an area, eliminating any line-of-sight and weather problems. Point-to-point and point-to-multipoint wireless broadband need line-of-sight. Both of these systems also suffer serious signal degradation in heavy rain, and especially in fog, as anyone with satellite TV knows.
MRV will be filing for an IPO of this division before the end of September. It sounds too good to be true, but MRV will probably IPO three companies by the end of the year. And MRV shareholders can get a piece of all of them.
Then there were three
The third IPO will be the iTouch division, which provides network management solutions. Network management sounds boring, but it's leading the charge to smart networks that can prioritize content, allocate bandwidth and charge customers accordingly. This is the space Akamai Technology (AKAM:NASDAQ) is in.
iTouch also provides remote network monitoring equipment and a strong line of optical components called Fiber Driver. The product line includes converters, repeaters, switches and CWDM (coarse wave division multiplexing) technology that can accommodate gigabit speeds (billion of bits per second) over distances up to 110 kilometers (68.2 miles).
Financial data for both iTouch and Optical Access are still considered part of MRV. When MRV files an S-1 for each company's IPO we'll get a better idea of what these divisions are worth. Right now, with Luminent looking at a US$2.5 billion market cap, I think it's safe to say that the parts are worth more than the whole. A lot more. And all you have to do to participate in this massive unlocking of shareholder value is own MRV stock.
AprĖs le deluge...
Now, I can see the question coming, "What happens to MRV stock after it has spun off all of its value?" Could this be another 3Com/Palm Pilot deal, where the parent company gets crushed almost as bad as the spinoff? In a word, no. First of all, Palm is a one-trick pony. Anybody that expected this stock to maintain a US$40 billion market cap on US$1 billion in sales got what they deserved. In my opinion, with over a billion shares, the stock is still overvalued.
Optical Access, Luminent and iTouch are all more well-rounded companies, haven't had massive stock dilution, have a better target market and better profit margins. But most importantly, MRV isn't spinning off all of its value. Fact is, MRV has funded several other startups and still holds large equity stakes in all of them. Charlotte's Web, Zaffire, and Zuma Networks will help support the MRV stock price after all the IPOs.
Let me give you a brief rundown of the partner companies, because there's some really interesting technology going on here, too.
Charlotte's Web
MRV owns 53% of Charlotte's Web, maker of terabit routers. One router can handle 200 gigs a second, but the routers can be clustered to handle up to 5 terabits of data per second. This is a strong selling point, because carriers can add to their capacity on an as-needed basis. And Charlotte's routers, named Aranea (I think that has something to do with spiders) are fully compatible with Cisco equipment, which means carriers can do partial upgrades.
The Aranea router is only about three feet high. Compare that with Avici's router, which is 7 feet tall and weighs 875 pounds. To hit 5 terabits, you need 14 of those behemoths. I think Charlotte's Web has the more practical solution. Maybe that's why Juniper took an equity stake in Charlotte's Web in the last round of financing. MRV's 53% piece could be worth a fortune if Charlotte's Web IPO's.
Zaffire and Zuma
Juniper has also done interoperability tests with Zaffire, which is 20% owned by MRV. Tests went well enough for Juniper take a stake in this company as well. Zaffire has created an optical networking system for the metro area, the final frontier for optical networks. Morgan Stanley and Bank of America Securities, among many others, have also invested in Zaffire.
Williams Communications (WCG:NYSE), another investor, is currently testing Zaffire's lead product, the Z3000. The Z3000 will expand the capacity of metro networks using less power and a smaller footprint than any other product on the market. It's also backwards compatible to SONET architecture, as well as designed to work with future network topography. Zaffire has created a proprietary technology that allows a metro fiber ring topography to act like it was mesh topography. In other words, any node on the network can communicate with any other node directly. For more discussion on network topography, you should really check out the website www.lightreading.com.
I'm starting to run out of space and I feel like I've barely scratched the surface of this complex company. I highly recommend you call Diana Hayden, investor relations rep for MRV. Her number is 818-773-0900, ext. 362. You could also spend hours perusing the websites for MRV and its partner companies at www.mrv.com.
I just want to quickly mention Zuma Networks, yet another partner company 90% owned by MRV. They make a Linux based switch/router combo. The switch is packed with 64 CPUs, giving it supercomputer speeds. Zuma deployed the world's first Gigabit Ethernet network and had a hand in establishing the standards for this technology. There. I'm done.
Outlook for MRV stock
Up till now, MRV Communications has remained fairly anonymous. I doubt that's going to last as the steady stream of IPOs calls attention to this company. As it stands, only two Wall Street analysts follow MRV. Amazing. There's a number of ways to play this stock. I bought some, a whopping 100 shares at US$58, and I plan on holding till I squeeze out every share of the IPO companies I have coming to me. I like the buy and hold thing. But if you have a trader's mentality, I imagine this could be a good stock to trade. I anticipate wild swings in the stock — spikes up before IPO distribution and troughs afterward. If you decide to trade it, pay close attention to the distribution dates and the shareholders on record dates. You don't want to miss getting your share. Also, as Sui-Yee will tell you, there's plenty of short-term profit potential to be found in the Luminent IPO alone.
I'm going to set US$60 as an entry point for MRV Communications. I think there will be some hype and a corresponding run-up in MRV before the Luminant IPO, which should occur before the end of September. If the stock runs too hard, a pullback is likely after the IPO, which will give us a good entry point. I'll be tracking the action and revising this entry strategy on the Taipan Bureau of www.247profits.com. Full disclosure: As I stated above, I personally own shares of MRV Communication.
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