It’s Showtime for This Optical Networking Stock

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Optical networker Finisar (NASDAQ: FNSR) is expected to release its second-quarter results on December 5. While Fool analyst Seth Jayson has already briefed us about the boxes Finisar’s report needs to check, I will try to see if the company can do the needful on Judgment Day.

Finisar’s previous quarterly report was the worst a company’s management could dream of. The company missed on both revenue and earnings, while the outlook for the second-quarter was also ugly. That time, Finisar had said that it expected to earn 12 cents to 16 cents in the second-quarter on revenue of $225 million to $240 million. This was in stark comparison to the Street’s revenue and earnings expectations of $236 million and 19 cents, respectively.

Those consensus estimates have been lowered significantly since then, and the Street now wishes to see earnings of 14 cents a share on revenue of $231.8 million. If Finisar manages to park its revenue and earnings at the mid-points of its own guidance, it should beat estimates on revenue and match on earnings. But will Finisar be able to pull this off? Let’s take a look.

In Doubt

If we take a look at history, the top line performance has been far from inspiring. Finisar has consistently missed on the top line in the last five quarters. While the company should ideally be able to at least meet the lowered estimate, it might find it difficult to do that for a number of reasons. International markets form a major portion of Finisar’s revenue, and they were the reason behind its lackluster performance last quarter.

Weak spending in telecom and networking infrastructure due to a slowdown in the Chinese economy along with the European crisis have hurt Finisar this year. Moreover, according to research firm Infonetics, sales of fiber optic equipments declined 7.4% in the third-quarter. This makes it more difficult for Finisar to satisfying revenue numbers once again and I won’t be surprised if the company falters once again.

Moreover, it seems Finisar is losing market share to rival JDS Uniphase (NASDAQ: JDSU). JDS Uniphase’s cutting-edge products have enabled it to record solid growth in sales of its new products, hurting Finisar in the process. Coupled with impressive cost –cutting moves, JDS Uniphase seems like the best optical networking investment one can make and it would take a lot of effort on Finisar’s part to catch up with its rival.

Better off

Finisar has performed better as far as its earnings performance is concerned. It has beaten expectations twice, met on two occasions and missed once. But, its bottom line performance has gradually degraded over the past five quarters and I won’t be surprised if the company misses this time also.

The company’s adjusted earnings have nosedived a whopping 178% this year. Finisar is making investments in research and development to shore up its product portfolio in order to compete with JDS Uniphase and win back market share. Even though the management had stated that they expect the gross margin to improve slightly in the second-quarter, significant R&D investments might hinder it from meeting on the bottom line.

For the Long Run

Finisar might be under a lot of pressure now due to shrinking demand for fiber optics products and competition from JDS Uniphase, but the company is focused on fighting back. While R&D investments might hurt its EPS performance in the short-term, they are a necessity if Finisar is to strengthen its position in the industry.

In addition, the company can gain from a pick-up in telecom spending in China as faster networks are built. Finisar could benefit from its clients such as Huawei and Alcatel-Lucent (NYSE: ALU) in the Chinese market. Alcatel-Lucent recently landed a major contract to build a decent chunk of China Mobile’s 4G trial network through its Alcatel-Lucent Shanghai Bell venture in the country.

Hence, as Finisar’s Asian clients like Alcatel-Lucent are in the thick of things when it comes to providing gear for new networks, the company could do well in the long run. Moreover, build out of data networks should also help Finisar in getting its fortunes back on track as the company supplies products to networking giant Cisco (NASDAQ: CSCO).

Cisco accounts for more than 10% of Finisar’s revenue and its investments in cloud computing and data centers should act as tailwinds for the optical networker. Cisco recently announced that it would acquire Meraki and Cloupia for improving its position in cloud computing, which further tells us that it is highly focused on making the most out of this opportunity. Hence, Finisar’s illustrious customers can drive its growth in the long run on the back of the data boom and faster 3G/4G networks.

The Takeaway

Fool analyst Anders Bylund had once told us why Finisar’s quarterly reports are more of a weather report that might lead investors to miss the bigger picture. The company operates in an industry which presents huge opportunities for growth, is focused on improving its offerings, and has well-known customers. This is a potent combination that can deliver in the long-run and it would make sense to keep Finisar on your radar as a possible investment.

We would come to know more about the company’s direction after its earnings report and conference call, which would indicate for how long the current weather conditions would last. For more insights on how Finisar is faring in a depressed market, tune into this space again after earnings. 

TechJunk13 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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