Finisar’s not a Fallen Angel

Harsh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Fiber optics player Finisar (NASDAQ: FNSR) has been hammered almost 24% into the red zone so far this year. The stock didn’t do much to get out of a slump after posting a mixed fourth quarter either. Although Finisar met on the bottom line, it came up short on revenue expectations. In addition, a weak outlook didn’t do much to inspire confidence amongst investors.

What gives?

Finisar’s revenue has grown at an annual rate of 24% over the past three years; quite impressive if you are in a rapidly growing industry. However, the top line has barely moved north from where it was at the end of fiscal 2011. The same story holds true for revenue of $240 million posted in the fourth quarter, well below the $244 million Mr. Market was expecting.  

The lack of top line movement is certainly a matter of concern along with Finisar’s guidance, which came in way behind the Street’s projections. Finisar has been hit by low spending by telecom companies and a fall in prices of telecom products. Its margins have shrunk and investors can’t see anything but cloudy skies ahead. But once these cloudy conditions disappear, Finisar’s investors can again expect a return to its glory days. Let’s check why.

Huge potential ahead

Firstly, Finisar is in the midst of a data boom. As telecom operators build more infrastructures for ultra fast 4G networks, it will have enough room to flex its muscles. Telecom is a highly cyclical industry as infra spending is done in large amounts and takes a lot of time. This slowdown is merely a passing phase and as telecom companies get more aggressive on 4G rollout, Finisar will be well placed to record significant gains.

Secondly, Finisar has been pretty active on the product development front and is preparing itself for better days ahead. It has a number of new modules in the works and its existing products, such as the fiber channel transceivers, are finding good traction.

Executive Chairman Jerry Rawls is unperturbed even though the macroeconomic situation is not conducive. According to him, “Ultimately the telecom service providers will have to spend more on optics and bandwidth expansion as the loading of the networks continues to grow. When this spending comes back, we believe that Finisar is uniquely positioned to reap the benefits.”  This statement holds quite true as the number of mobile subscribers is expected to clock 9 billion in the next five years. Hence, as more and more users get onto data networks, telcos will need to keep building more infrastructures along with upgrading and maintaining the current ones, resulting in better business for Finisar.

Not alone

Finisar’s drab outing in the quarter could have been witnessed from a mile away as prime rival JDS Uniphase (NASDAQ: JDSU) had seen its revenue drop 10% and also guided lower. Moreover, following Finisar’s report, JDS saw its price targets cut by several analysts but held on to its “Buy” rating nevertheless. This further emphasizes the fact that the industry is not done and dusted and growth is expected to come back.

The takeaway

The once blue-eyed boy of the fiber optics industry is now struggling to replicate the levels of standards it used to set. Its earnings have been on a downhill course and demons in the industry have been playing havoc with it quarter after quarter. Earlier, Fool analyst Anders Bylund had rightly pointed out why Finisar’s quarterly reports are nothing more than a weather forecast, which might lead investors to miss the bigger picture. The expected growth of data-hungry devices and the advent of 4G LTE are trends that investors need to take a look at and keep their faith in Finisar.  

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