A Beaten Down Stock That You Should Not Miss

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

I was expecting fiber optics component supplier Finisar (NASDAQ: FNSR) to lift the pall of gloom surrounding the optical networking industry, but that honor instead went to Ciena (NASDAQ: CIEN). Ciena’s latest results put fears of a tepid telecom spending environment to rest, and this rubbed off onto the others in the industry.

Ciena surprised the Street by posting a profit, and its guidance for the ongoing quarter rounded off a solid earnings report. The company’s expectation of $465 million to $495 million in revenue for the current quarter is in line with consensus estimates at mid-point. This indicates that Ciena’s business is witnessing strength, and it won’t be surprising if it continues to get better.

But when Finisar’s turn came to report earnings, the stock was given a cold reception and fell more than 8%. So, what did Finisar do wrong? Well, nothing as such. Finisar’s revenue matched Street estimates, while earnings trumped expectations by a penny.

Some nitpicking

A solid quarter was accompanied by a decent outlook. Finisar expects revenue of $235 million to $250 million in the ongoing quarter, while earnings are expected to be in the $0.15-$0.19 range. This is slightly better than the Street’s projection of $241 million in revenue and $0.16 in earnings, at mid-point.

However, some analysts, such as Simon Leopold of Raymond James, aren’t too sure of the company’s telecom side of the business. Leopold says that Finisar’s “higher outlook doesn’t justify meaningful appreciation,” apart from listing a number of headwinds that might affect its performance. Opinions such as these perpetrated a drop in the stock price, but I believe investors should be jumping at this opportunity. Let’s see why.

Nothing cloudy here

Finisar’s datacom business is delivering decent growth, which isn’t surprising considering that it possesses excellent products and counts Cisco (NASDAQ: CSCO) as a customer. Finisar’s new products are witnessing strong traction, and its new optical engine technology is expected to deliver efficient performance, which is exactly the sort of thing which would help it land more design wins.

Moreover, Cisco’s aggressive moves in cloud computing are certainly helping Finisar’s business to grow, as evidenced by an 11% jump in datacom revenue from last year. Cisco’s data center business is outperforming its other segments, and the growth is here to stay. The networking giant is looking to profit from the Internet of things, as it would amplify the amount of data sent to data centers, and thereby result in the need for more data centers.

Clear skies ahead

Finisar’s telecom business would be pressured in the quarter due to a reduction in prices of telecom products, which came into effect from January. However, Finisar remains optimistic about the prospects of its telecom business. Management states that they have been bringing new customers on board, and are now increasing capacity to meet improved demand.

It’s not surprising that Finisar expects improved demand for its telecom products going forward. As Ciena, which happens to be a customer, forecasted a better year for telecom spending, Finisar’s telecom prospects received a boost. Finisar’s telecom business declined from last year due to tepid carrier spending, but things should get better from here. AT&T’s investment plan for upgrading and expanding its network would certainly help its supplier Ciena, and Finisar in turn, benefit from an uptick in spending.

The takeaway

Finisar has been under pressure of late, declining close to 11% so far this year. The reaction to its latest earnings report seems quite overboard, as the company’s telecom business should get better as the year moves on. On the other hand, its datacom business is already doing well. The company is aggressively investing in products for next generation gridless networks, which could lead to more design wins and better revenue in the future.

Hence, the latest drop opens up an opportunity for investors to get in, or add to their Finisar position as the stock has enough fuel in the tank to fly higher in the future.

Harsh Chauhan has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems. 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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