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IPOs Entice Investors, but Wall St. Remains Cautious

The near-quadrupling of Marvell Technology Group (MRVL - Get Report) in its stunning stock market debut on Tuesday, coupled with the tripling of Accelerated Networks (ACCL) on its first day of trading last Friday, have certainly caught the attention of investors.

But it is probably premature to proclaim that the red-hot market for initial public offerings has returned, some analysts say.

"The environment has improved somewhat," said Steven Tuen, head of research at IPO Value Monitor. "But a lot of investors are still cautious and taking limited bets."

Marvell's near-300% leap notwithstanding. The designer of integrated circuits that store and transmit data at high speeds closed up 41 5/8, or 269%, at 56 5/8, even more than expected by George Nichols, a research analyst at Morningstar.com, who predicted that Marvell would have the biggest opening-day pop this week.

Marvell, based in Sunnyvale, Calif., boasts impressive numbers: net income of $13 million on revenue of $81 million. It also helped that the company, which sold 6 million shares to the public at $15 each for a total offering of $90 million, only offered 7% of its total shares.

"That's an unusually thin slice," Nichols commented. "There are a lot of investors chasing after a few shares, which magnifies the pop."

Marvell's rise may be tied as much to the limited supply of high-quality names as to company-specific factors. The last quarter saw as many as 20 IPOs a week. For the first time in a long time, there are that many slated to list this week, but some will inevitably be postponed.

A better example of how the new issue market has yet to fully come back is Stratos Lightwave (STLW), yet another IPO poised to take advantage of investor hunger for optical networking plays. The supplier of optical networking gear such as transceivers and fiber-optic connectors sold 8.75 million shares at $21 each for a total offering of $183.75 million, above the pricing range of $16 to $18.

Stratos closed its first day at 34 1/4, up 13 1/4 or 63%, after rising as much as 167% earlier in the day.

Though a respectable performance, Stratos' first-day gains hardly matched those of its optical networking peers, which jumped despite lackluster market conditions. New Focus (NUFO) rose 155% on May 18, Sonus Networks (SONS) rose 120% on May 25 and ONI Systems (ONIS) rose 230% on June 1.

The Chicago-based Stratos has a stellar list of clients -- including Canada's Nortel Networks (NT), Cisco Systems (CSCO) and Alcatel (ALA) of France -- and can boast of profitability, having earned $3.8 million for the year ended in April and booked profits every quarter over the past two years.

However, "its 55% sales growth year on year is not as fast as its competitors and it's not the clear market leader," Nichols explained.

Stratos is a division of Methode Electronics (METHA), and its chief competitors include Agilent Technologies (A), Finisar (FNSR), Molex (MOLX) and Germany's Infineon Technologies (IFX).

Despite his cautious stance, Nichols still called this the "best Tuesday we've had in a quarter." Even so, before he calls a recovery, he wants to see a greater quantity of IPOs in the market.

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