MRV Gains Value by Casting Out Its Web
Wall Street’s confidence in the growth of e-commerce has swelled the stock price of MRV Communications Inc. by more than 80% in the past three months. That performance has given the manufacturer of network and fiber-optic hardware one of the fastest-growing market caps among Valley-based public companies.
MRV’s stock price has been something of a yo-yo, however, to judge from the movement of prices in the past 12 months. Shares of MRV, which trade on Nasdaq, closed Monday at $23.63, near its 52-week high of $26, and well above the $13 range at which MRV traded at the end of June. At the end of March the stock price hovered in the $5 range.
A number of factors are responsible for what one analyst called the current “nosebleed valuations” of MRV and companies that make hardware for Internet and telecommunications. Partly that is due to the mood swings that technology stocks seem to provoke in Wall Street.
At the same time, the price reflects the view of analysts that the company is keeping pace with a small number of firms that make devices that enable Internet service providers to handle an increasing volume of customers and e-commerce merchants to keep track of an increasing number of online transactions.
Much of the current bounce in MRV’s stock price is due to anticipation of its Red-C product line. The new products give greater flexibility to cable companies and other networks. One application allows cable networks and telephone companies to offer their subscribers an expanded menu of services, which could be important profit centers for network carriers.
Additionally, MRV is developing new equipment that can manage networks based in the Linux operating system.
“People who are in the business of running networks like the idea of being able to write their own applications . . . and not be limited by the proprietary solutions that networking companies provide them with today,” said Edmund Glazer, vice president of finance and administration.
The company was founded in 1988 as a maker of switches for local-area networks (or LANs), which are used to link computer users within a company or work environment. The company has since expanded into an almost bewildering number of fields. In addition to its network-switching equipment, the company also makes devices that direct traffic on fiber-optic networks, and is an investor in several new technology start-ups.
MRV’s expansion into “high-end” network business, such as making switch-and-routing systems for e-commerce and wide-area networks, reflects the competitive pressures for equipment in the lucrative LAN market. Indeed, the battering of the company’s stock last spring reflected Wall Street’s perception that MRV was losing ground to competitors, such as Intel and 3Com, in the cutthroat LAN marketplace, according to analyst Chester White of First Security Van Kasper in Los Angeles.
MRV’s Glazer said the company has since “stabilized” its position in the LAN market by introducing new products that helped the company keep a grip on its market share and revenue growth. At the same time, MRV is redirecting its products toward “higher-end markets which are less competitive.”
Analyst Vivek Rao of Gruntal & Co. in New York said MRV’s rebounding stock price reflects that the company has “achieved break even” in its network-switching business, after several quarters of losses. Some of those losses were due to MRV’s efforts to lower its cost structure and bring the “higher-end” products to market, such as the switches that facilitate e-commerce and other big tasks involving large networks.
Another reason for the improved performance of MRV’s stock is the “tremendous amount of money moving into the market” for e-commerce, “which is something that investors love right now.”
While switches currently exist to handle e-commerce, MRV’s equipment can make those switches more efficient by enabling them to handle a higher number of calls. Thriving Internet-based businesses may be reaching limitations on their ability to handle messages from consumers. “To handle the increase in traffic, you need a more robust network in general,” said Rao.
MRV has taken a step to make the company less confusing: In July, president and CEO Noam Lotan announced that MRV would separate its fiber-optic business into a subsidiary known as Optical Access. Among its products are devices that send and receive fiber-optic signals for residential telephones, cable TV and the Internet--a potentially enormous market. Currently, about 200,000 homes nationwide receive fiber-optic services from devices created by MRV, according to Glazer.
The move may please investors who wish to make a “pure play” or concentrate on one kind of technology, rather than a basketful, according to Gruntal’s Rao.
Yet another reason for Wall Street’s current romance with MRV is the company’s role as investor in new technology start-ups. One is Charlotte’s Web, which is involved in terabit routing--a high-speed, high-volume communications technology--while New Access Communications makes products for fiber-optic networks. MRV owns about 60% of those start-ups.
In time, MRV hopes that the “incubator” companies will attract investors, and some may even spawn their own public companies--events that could be very profitable to MRV and its shareholders.
One sour note is the abrupt departure last month of Zeev Rav-Noy, a co-founder of the company who had served as chief operating officer, treasurer and director. Rav-Noy cited “personal reasons” for leaving.
Analysts hinted that Rav-Noy may have disagreed with recent management decisions, including the hiring of new senior managers. The resignation, however, is not expected to affect Wall Street’s view of the company, according to Rao.
