21st Century Investor Special Report
The Next Fiber-Optic Stock to go BERSERK!:
Double your money in the next 12 months
Investors have a unique opportunity right now to get in on the hottest investment sector -- fiber optics and optical networking -- at bargain prices. It's really the only way to get into this sector without having to pay "nose-bleed" prices. In this Special Report, we'll tell you about a relatively unknown company that's in a unique position to capitalize on the explosive growth of communications networks, and the need for the next generation networks of tomorrow to transition purely into the optical realm.
The company is MRV Communications (MRVC: Nasdaq). They are not well known in the investment community, or even followed by Wall Street analysts and the research departments at big investment banks. They are still "under the radar" to most investors -- but not for long! The word's definitely getting out on MRV, and people are liking what they hear.
Already the smart money is taking huge positions in MRV, but trying to stay quiet about it as they accumulate more and more shares on the cheap. Just take a look at the number one investor in this company -- Fidelity Investments. Fidelity is the heavyweight champion of the mutual fund industry, and they own a colossal 7.1 million shares of MRV, equal to 11% of the company. The highly regarded managers at Janus Capital also own 2.5 million shares, and Credit Suisse First Boston and Vanguard are also busy accumulating hundreds of thousands of shares. These institutional investors don't take positions like this unless they've thoroughly done their due diligence -- so you don't just have to take our word for it on MRV. The analysts at the big mutual funds are also heavily into this company.
MRV's our number one stock pick right now, for the simple reason that there's a huge amount of shareholder value about to be unlocked here. When you buy the stock of MRV, you're actually buying stakes in 14 different operating companies.
MRV is on an aggressive and well-thought-out campaign to transition itself into a holding company of various niche companies, each focusing on one specific section of the fiber optics puzzle. Characterized by its CEO as "a company of companies," MRV, part venture capital firm, part incubator, has been creating and buying start-ups that have the potential to expand and develop into leaders in their own right.
Already five of these subsidiary companies are scheduled to be spun-out in IPO's over the next year. The first of these IPO's should be happening in October, with subsequent IPO's lined up like jets on the runway to take off at 3 month intervals. The best part: MRV plans to maintain 80% ownership stake in these subsidiary companies, which they will then distribute to their shareholders after 6 to 12 months. So all you have to do to get stakes in a handful of hot optical companies -- at pre-IPO prices -- is to own shares in MRV today.
But don't wait around too long. Once these IPO's start flying out of the gate, the stock should really start to move. But there's still time to get in early, as the optical networking revolution is really just getting underway.
Bandwidth, networks and photons: You can still get in on the ground floor
You hear a lot of talk nowadays about "fiber optics" and "optical networking", and how it's the hottest area of investing -- just look at the charts of stocks like JDS Uniphase, Cisco, Nortel, and Corning. They are all flying (our subscribers have been in JDSU since it was a little known Canadian company named JDS Fitel, over 1800% ago!). But most people don't realize that these companies are pretty much exclusively focused on providing optical equipment for the long-haul portion of the Internet -- the so-called "Internet backbone" at the core of the network.
MRV isn't trying to compete in the highly competitive network core -- where the Ciscos and Nortels and Alcatels are slugging it out, with components supplied by JDS Uniphase and Corning. They are looking to carve out a dominant position in the biggest optical markets of tomorrow, which we are moving towards quicker than anyone imagined. MRV's vision is to bring optics further out into the network, moving the bandwidth towards the "edge" of the network (meaning you, the Internet user -- you're on the edge of the network).
There is no question that this is the wave of the future. Right now there is a huge gap between the bandwidth speeds at the network core, and the bandwidth speeds at the edge of the network. It's this big bottleneck that's so frustrating to most Internet users. The ultimate solution will be to bring light signals, or photons, all the way out to the end-user. It will be eventually be photons, not electrons, that will be the primary movers of digital bits around the globe, and eventually these photons will make it all the way to your house or office. If MRV has its way, this will be sooner, rather than later.
MRV is working on a cohesive solution to bring the high bandwidth at the core of the network right to you. To simplify the explanation a bit, you can think of the Internet this way: there is the high-speed, fiber rich network "core", where all the big bandwidth pipes are. Then there's you, the end-user, out there at the edge of the network, also known as the "access network". Bridging the gap between the core and the access network is the "metro" or "regional" network. MRV is exclusively focused on the metro and access parts of the network. These are huge growth opportunities.
A broad range of abilities in optics
MRV's principal business right now is manufacturing optical components. These are the nuts and bolts pieces that power fiber optic networks, and these components are the scarcest commodities of the Internet revolution. MRV's in a nice competitive position in this industry -- aside from another of our favorites, JDS Uniphase (JDSU), MRV is the only merchant optical component company with a presence in both active and passive components. (The active components are the pump lasers and other components that shoot the light down the fiber; passive components are the gratings and filters that groom the signal after it's been generated. It's a great advantage to have capabilities in both areas).
With their recent key acquisition of Chinese passive component manufacturer Fiber Optic Communications Inc. (known as FOCI), MRV now owns a 150,000 square foot manufacturing facility in China that's already up and running. Manufacturing ability is the key to success right now, as demand for these components far outstrips the available supply.
MRV's been smart to go after passive components makers like FOCI. It's the same reason that JDS Uniphase has been able to capture so much of the market, and why they will be able to command more and more market share down the road. It's much more cost effective to make integrated modules for optical components. A manufacturer needs to have all the elements bundled together. MRV can do that now, and nobody else besides JDSU really has this ability in-house.
Right on schedule, the first of at least five IPOs is on the way
MRV's packaging up all their optical components businesses and spinning it out into a separate company, called Luminent, Inc (Nasdaq pending: LUMN). The filings with the SEC for Luminent have all been completed, and this issue is scheduled to price sometime in October.
The most important initial thing about this Luminent filing is that it came in a timely manner -- MRV was good to their word to file it within 90 days of their announced intention. This filing is the crucial first step for MRV in the minds of a lot of investors. As part of the IPO process, Luminent is now on their "road show", where they go to the major institutional investors and pitch their story. So the increased attention should start driving in more investors.
Besides FOCI, MRV is also folding in some other recent acquisitions into the Luminent fold. Two other Taiwanese companies, Optronics International, which makes laser diodes and transceivers, and Quantum Optech, which makes optical coatings, have also been recently added to the mix.
MRV shareholders stand to reap a bonanza from the Luminent IPO
MRV is taking the unusual step of planning to spin out all of its shares of Luminent to MRV stockholders within six to 12 months. And since MRV plans to own 80.1% of the stock of Luminent, at the very least, then this is going to be a big distribution of shares. The number of MRV shares you own will determine how many shares you receive of Luminent at the time of the distribution. The main proviso here is that the transaction needs to be set up as a tax-free distribution, which needs clearance from the IRS.
Remember, it's hard for the little guy to get in on the lucrative IPO game. Usually only the huge banks and institutional investors, and some select high--rollers, are let in at the opening bell on hot IPOs. But for MRV shareholders, if all goes according to plan, simply owning shares now gives you admission to this exclusive club.
Now, we need to be clear that the language in Luminent's S-1 filing with the SEC is very clear that they may elect not to do the distribution -- especially if they don't get tax free status -- or they may choose to delay the distribution of shares based on various subjective factors. We think there are benefits either way to MRV shareholders -- if they spin out the stake or not -- so we don't regard this as too big a wild card. If MRV keeps the shares, instead of distributing them individually, then the value of the Luminent stake will accrue in MRV's share price. (We've seen this before with Softbank, and it actually may deliver an even fatter premium not to distribute the shares. So please don't get too caught up in this distribution).
Luminent has all the earmarks of a lucrative, high profile IPO. Especially on the heels of JDSU's pending $41 billion acquisition of SDL, Inc, and the openly discussed but ultimately failed $100 billion merger of Corning with Nortel's optical component division. Valuations and interest in this sector are still at all-time highs.
And while it is part of the MRV incubator, Luminent is not some typical optical start-up company with just one product in beta testing. Luminent is already an established player with a wide range of products and customers -- including top names like Cisco, Marconi, Alcatel, JDS Uniphase, Extreme Networks, Foundry Networks and Cabletron -- as well as significant manufacturing capacity. At the recent Supercomm conference we attended, MRV CEO Noam Lotan said that Luminent is on pace to do $100 to $120 million in revenues this year, and over $200 million next year.
Since Luminent is already one of the leading active and passive optical component suppliers for the access and metro markets, then a lofty valuation is in the bag. Especially since they've rounded out the story at Luminent with the addition of a new CEO, Dr. William Spivey, formerly Group Vice President of Networking at Lucent Technologies. He's a heavyweight in the industry, bringing a lot of credibility on Wall Street.
We anticipate that Luminent will quickly receive a multi-billion dollar valuation in its own right following the IPO. Since the average optical component stock trades at roughly 40 times next year's earnings, then Luminent could conceivably reach a valuation of $8 billion. Even if it gets just halfway there, and achieves a $4 billion valuation, then that would be a bonanza for MRV shareholders.
You know why? All told, there are 14 different companies in the MRV group. We think that most of these companies have the potential to achieve multi-billion dollar valuations in their own right. Right now the parent company's total market cap is a little under $4 billion, based on the current stock price of $62. (The market cap was only $2 billion when we first recommended MRV at $37, back in May; so the upside is explosive in this stock).
Luminent is just the beginning!
MRV recently made a very crafty purchase of AstroTerra Corporation, to complement their earlier acquisition of Jolt -- and the announcement that this 100%-owned subsidiary will now be called Optical Access, Inc. The most exciting part of this announcement is that Optical Access is now ready to be spun-out in an IPO, which they plan to file within the next 90 days. Now that MRV's executed on the Luminent filing, we have every reason to believe that we'll see an S-1 filed with the SEC for Optical Access before the end of October.
This IPO is also going to be very big for MRV's shareholders, in our opinion. Optical Access could supplant Zaffire (another MRV company bursting with opportunity -- see more below) or Luminent as the crown jewel in MRV's portfolio. Optical wireless last mile connectivity may at last be the technology that busts open the bandwidth bottleneck -- as it can easily, quickly, and cheaply extend the penetration of photons directly to the end user. Optical Access will use lasers that use less power than a barcode scanner at the supermarket to transmit infrared laser signals straight into your home or office.
There are many advantages to this architecture, and Optical Access is going to be the clear early market leader. Although secrecy is still important, and details are hard to come by, we think Optical Access could quickly prove to be equal to or better than TeraBeam (partnered with Lucent) or AirFiber (partnered with Nortel), and it could achieve a multi-billion dollar market cap right out of the gate.
And if MRV follows its model with the Luminent spinout, then by Q2 of next year current MRV shareholders could be sitting on 80% of the shares of Luminent, and 80% of the shares of Optical Access. (Not to mention 80% of the shares of iTouch, another looming spinout, that already has America Online and Williams as customers for its subscriber management systems. There is a tremendous amount of value to be carved out of MRV).
Now, if you don't believe that these spin-off IPOs will ever amount to anything, then it's worth taking a look at some recent action in this sector. Corvis (CORV) priced recently at $36, and quickly jumped to $84 on its opening day. That's a $28 billion market cap. And they're basically just an optical startup that's just out of beta testing! Avici (AVIC) also priced that same day at $31, and quickly traded to $100, for a market cap of $4.6 billion. Avici's terabit router is a much heavier and clunkier unit than the one from Charlotte's Networks, another MRV subsidiary company with an IPO in the plans.
Who's to say if this frothiness can keep up among the next-gen networking and optical networking IPOs? We think it can, for the foreseeable future. There could be a lot of value created from MRV -- especially when you consider that they are going to spin out the majority of the shares directly to MRV stockholders, as a tax-free distribution.
That means that this time next year, you could be sitting on shares of MRV, Luminent, Optical Access, iTouch, and perhaps even Charlotte's Networks, Zaffire, and Zuma Networks. That would be quite a portfolio -- and all you have to do to get it for pre-IPO prices is to own MRV's stock today.
Optical Access could beat TeraBeam and AirFiber to the punch
It seems that Optical Access (we'll call it OA for short) is farther along than we had realized from the clues MRV was giving us -- hence the accelerated IPO schedule. Folding in this recent acquisition of AstroTerra into the OA mix has provided the missing ingredients to round out the complete recipe for wireless optics -- reliability in all weather conditions, and much greater reach than the competition.
One of the main engineering problems that still needs to be overcome with wireless optical systems is performance in bad weather. Rain and heavy fog can disrupt the laser signals that carry the information. But AstroTerra brings some valuable patents that overcome this "scintillation fade" problem. They also know how to overcome another interesting problem, called "building sway". This is just what it sounds like. You need point-to-point precision with these systems -- and buildings move!
A key differentiator in the product offering from OA, as compared to TeraBeam and AirFiber, is its ability to transmit over greater distances. They're claiming as much as 5 kilometers, and AstroTerra's done a successful trial with Lucent where 2.5 gigabits per second was transmitted over 2 kilometers. TeraBeam and AirFiber are only talking about transmitting a measly 100 meters in poor weather areas at this point. So OA is way ahead here, which could extend the reach of optical wireless solutions beyond the dense metro area.
They're also way ahead in actual customer deployments, with over 3000 installations already completed in the field. OA's customer list is surprising in its breadth and impressive in its make-up: Broadband Office, Allied Riser, France Telecom, Deutsche Telekom, Marconi, Davnet, and new service providers Broadband Highway and Tellair have started deploying OA's equipment.
Optical Access has stated it is going to deploy an "unconstrained, extended reach, mesh network architecture." The key word here is mesh, which means that every point in OA's network is going to have redundant connections to other nodes -- so any point on their network can reach any other point. If a problem occurs they can instantly re-route around it. Every wireless link will remain connected at all times
The mesh network also allows OA's service provider customers the option of building their network on a "pay as you go" basis. They will only have to deploy equipment when there is a customer ready to pay for it. They don't have to spend a ton of money upfront just to get the service up and running.
As we've mentioned, MRV company Jolt is also part of the OA mix. Jolt is an Israeli company that designs and manufactures data, voice and video wireless optical systems and is considered a pioneer in wireless optics. With over 3,000 systems already installed worldwide, Jolt has been an earl pioneer in this field.
Jolt's CEO and founder, Dr. David Medved, has said that MRV might have just pulled off the ultimate steal when it bought his company earlier this year. In fact, he said that if a patent that is pending is granted, then " we should have sold the company for a few trillion dollars". He was kidding, but it's an interesting point of speculation...
What is he talking about? Jolt has developed a unique system to perform wireless communications without electronics. These systems project photons through the air, and then pick them up a kilometer away -- without converting the signal to electrons on either end. They're transmitting data strictly with photons. That's never been done, and according to Medved, it's close to actual commercial deployment. Right now, the technology has been demonstrated only in the lab and in the field.
This technology could go a long way in eliminating what has traditionally been the bottleneck in optical networks. If this pans out, it would be one of the "holy grails" of optical networking. We don't know how much of this talk from Medved is showmanship, but if he's really able to transmit photons, then we could be on to something very, very big. He says they will be introducing a product within six to 12 months.
If this patent is granted, and it works -- big "ifs", mind you -- then Jolt's technology could become a key enabler of any all-optical wireless network. We'll keep a close eye on this patent and this product, and we'll pass on more details as we get them.
A complete turnkey solution that saves money for carriers
MRV has taken Optical Access beyond just providing one component of a last mile solution. They've taken it a step further, and are rolling out a complete turnkey solution for service providers that want to get a complete system deployed in a hurry. To this end they're developing a full service solution that includes switching, provisioning, authentication, billing and security.
That's the benefit of being in the MRV group of companies. Optical Access is going to be able to provide a complete solution right out of the gate, using gear from other MRV subsidiaries, like OptiSwitches from Nbase-Xyplex, WDM components from Luminent, subscriber management systems from iTouch, and so forth. Having a complete solution is more important than you might think for service providers -- they simply don't want to have to piece things together themselves. That's why Cisco and Nortel traditionally capture most of the business.
Nurturing the young ones until they're ready to leave the nest
Even MRV's non-majority stakes could end up being worth a fortune. For example, their 23% stake in white hot optical networking start-up Zaffire (not yet public) could easily end up being worth more than $2 billion all by itself.
The son of MRV's Chairman founded Zaffire with an initial investment from MRV. Subsequent investors were legendary venture capital firm Kleiner Perkins, as well as Juniper Networks. A recent second round of funding brought in even more top names, like Integral Capital Partners Oppenheimer, and Morgan Stanley Dean Witter. Zaffire's credentials so far are impeccable, and their products are attracting a lot of industry attention.
Focusing on optical networking in the bottlenecked metro areas, Zaffire's products, such as the much-anticipated Z3000 optical service platform, have many features that bring down the cost by a full order of magnitude. So far, nothing's really been done to bring fiber rings into high-density metropolitan areas. But this is the next logical extension of fiber -- from the backbone right into the downtown areas.
Zaffire's platform offers twice the wavelength density of systems already out there. This means that twice the data can travel in half the space -- and using just half the power. And what's more, the Z3000 is fast and cheaper than what is currently available. It is billed as network infrastructure that can expand and change with the customers' needs. Importantly, Zaffire promises to interact with existing Synchronous Optical Network (SONET) technology -- this is crucial as carriers that have lots of SONET equipment want to get lots of life out of it while they transition to the next-gen DWDM systems like Zaffire's.
The buzz is that Zaffire's Z3000 will be a huge breakthrough for metro and regional markets, because it scales rapidly, and it's got a cheaper per port cost than current offerings. It also has a small footprint and uses less power, which is an important consideration in overcrowded telco central offices.
The Z3000 is more than just a great concept. Trials on the actual product have been underway for some time, with Broadband Office (BBO) and Williams Communications involved for some time in heavy testing. The first commercial orders are expected to ship during the fourth quarter of this year.
The potential of its end markets, coupled with the wide-open playing field, could give Zaffire a gigantic valuation, probably between $8 to $10 billion in a favorable IPO climate. That could make MRV's 23% stake worth about $2 billion. Also, as we reported, there has also been talk that one of the bigger players, like Juniper Networks, could scoop up Zaffire before they even make it to an IPO.
Don't overlook Charlotte's, and their other companies
Charlotte's Web Networks (CWN) is an Israeli start-up (founded in 1998) with an incredible amount of buzz around it. The team at Charlotte's has developed a terabit router, and is busy taking it right into the face of the big boys like Cisco and Juniper. Amazingly, mighty Cisco has been slow to market with their terabit router, and their arch-competitor Nortel Networks doesn't even have a product in this area -- a real weakness for them. Juniper has been stealing away router market share in a hurry.
Charlotte's Aranea product line is a terabit router with a great twist -- it's got backwards compatibility with some older, TDM standards, that make it great for carriers that want to keep using their "legacy" equipment as long as possible. Voice, video and data can travel along the same framework here, eliminating the need to cross connect equipment for each type of transmission. This enormously capable router offers an "all-in-one" proposition without compromising the quality of either. Because it won't be a purely data router, it could conceivably capture market share quickly as the integrated routing platform for voice, data, and video. Charlotte's Networks plans to begin shipping out these products later this year, and they are already in deep beta trials with 4 big-name companies (not identified yet).
There have been published rumors that CWN, which is 53% owned by MRV, has a billion dollar buyout offer on the table. The company is flatly denying the story, and we agree that Charlotte's isn't going to be sold for one billion -- that figure's too low. The rumor probably started because two big strategic partners have been conducting trials with their Aranea terabit router. The strategic partners haven't been formally announced, but we're sure they're big names, like a Nortel or an Alcatel or another big systems vendor.
It's easy to assume that these partners are sniffing around for a buyout -- which is possible, no doubt. But with Charlotte's competitor Avici freshly out of the gate with a $6 billion market cap, then we doubt that MRV and the team at Charlotte's would sell themselves for so much less. Plus, they've taken the step to completely deny the rumor. Most rumors that are true generally elicit a curt "no-comment".
We'll have to take a "wait-and-see" on this one, but either way, MRV shareholders stand to gain from Charlotte's Web Networks, another one of MRV's crown jewels.
Some of MRV's companies are still operating in "stealth mode", so it's hard to get a lot of information. Zuma Networks, founded in 1998, is an equipment provider for increased bandwidth network management in metro networks. Zuma's product line includes a family of switch/routers (a new category in and of itself) that can be adapted to a number of networks, including enterprise, or company-wide, networks. Zuma was also a pioneer in the area of the Gigabit Ethernet, a super-fast network system. With its expertise in equipment, Zuma fits in well with the other optical networking companies under the MRV umbrella. Gigabit Ethernet, and the evolving 10 Gigabit Ethernet standard, are becoming very hot areas right now (our subscribers have already made a bundle on Extreme Networks, one of the pioneers in gigabit ethernet for metro areas).
iTouch Communications was formed this past May when MRV acquired Geneva, Switzerland based- CES, an Internet infrastructure player. iTouch provides the optical expertise of MRV with the Internet infrastructure of CES to offer high-speed data acquisition and management systems.
Many of the product lines in iTouch have come from MRV's subsidiary company Nbase-Xyplex. Its flagship product, the OptiSwitch, is a high-end "fiber-to-the-curb" networking solution applicable to a wide range of networks. Not much is available about iTouch, but apparently this company is ready to go with an IPO of its own, and already boasts customers like America Online for its subscriber management systems. This is an area currently dominated by Redback Networks, which has a lofty valuation; if iTouch can carve out some of this market then it too will be a very hot IPO for MRV's shareholders.
Last but not least, another MRV company is Hyperchannel, MRV's first and so far only foray away from the hardware side of the business. Hyperchannel is providing business-to-business web solutions for systems integrators in Europe. Hyperchannel is operating independently, without the MRV name attached to it, but is nevertheless 42% owned by MRV.
Everything is in place...now just sit back and watch
The only Wall Street analyst covering this company maintains that MRV is one of the most undervalued companies in the optical networking arena, and he's slapped a strong buy rating on the stock with a 12- to 18-month price target of $158. We think his estimate is going to end up being conservative, once the IPOs start flying out of the gate. We haven't been this excited working the numbers since running through Softbank's holdings in February 1999, and subscribers who took our initial recommendation on Softbank are up about 500%!
By now, you probably get the picture on the potential here at MRV. But we've got to issue a warning: don't think for a second that this is anything other than a speculative, "swing for the fences" type investment. There are still many, many execution risks to overcome before these products, and start-up companies, start to pay off big. Yet, the big names in networking have proven that they are willing to pay billions to lock up these types of companies early.
We hate to jinx it, but MRV could end up being the next JDS Uniphase for our subscribers. Yep, there's the potential for 5 times, even 10 times your money in this stock over the next three years. But remember, you have to live with volatility, and if it goes down -- it doesn't necessarily mean there's something wrong! It just means it's volatile, and the market's having a hard time placing a value on MRV's assets.
MRV Communications is a big and complicated story, but as more and more investors discover MRV, then we think that they will be just as enthusiastic about the stock, even when the price is in the hundred's! So don't miss out on any more of the upside in our number one optical networking stock. |
