Finisar Is Still Poised to Grow

With compelling secular trends coupled with a strong share-gain story, it may be worth keeping an eye on shares of Finisar.

May 24, 2014 at 6:00PM

Finisar (NASDAQ:FNSR) is a leading provider of optical subsystems and components for telecom and data communication applications. The stock has roughly doubled over the past year, fueled by a strong secular demand for optical equipment (driven by the build-out of high-speed LTE networks) coupled with a compelling market-share gain story. With the stock off slightly from its 52-week highs, it's worth taking a closer look at this market leader.

Compelling product and customer base
Finisar appears to have one of the broadest product portfolios in the industry. While the firm does have a number of potent competitors, notably JDS Uniphase (NASDAQ:VIAV) in the telecom space and Avago (NASDAQ:AVGO) in the datacom space, it appears that no other company matches the breadth of Finisar's product offerings across both of these segments.

Broad

Source: Finisar.

Now, lest one think that Finisar's offerings are broad but not deep, the company has seen steady share growth over the past 10 years and -- according to a December 2013 Ovum market study -- is currently the market share leader, with 16% of the market. This puts it well ahead of Avago, which has 9.7% share and JDS-Uniphase, with 8.6% share.

Market

Source: Finisar.

A secular growth market
While a broad product portfolio and strong competitive position are certainly compelling, investors would be remiss to ignore the underlying secular trends -- a good house is worth a lot less in a bad neighborhood. However, so far the pretty aggressive build-out of next-generation telecom infrastructure, as well as just the absolute explosion of data necessitating the continued growth in the data-center (helping Finisar's datacom business) have been good to Finisar, as the revenue picture suggests.

Finisar

Source: Finisar.

As a result of the compelling revenue picture, Finisar has seen rather tremendous leverage, with gross margins up 690 basis points year over year in the most recent quarter and operating margins roughly tripling over that same timeframe. This has driven rather substantial EPS growth and explains the doubling of the share price. However, while this picture looks rosy, there are some things worth considering.

What could go wrong?
Watchers of Finisar's shares have probably noticed some pretty extreme volatility in the stock price. This is reflected in the stock's beta, which comes in at 2.06, implying that the shares are about twice as volatile as the rest of the market. This is probably due in no small part to the fact that the number of sales sold short (remember that selling a stock short means that an investor is betting on a price decline) is a fairly high percentage of the total shares outstanding (17%, to be more precise).

Furthermore, the number of shares shorted continues to rise and is at the highest level seen during the past year. What is likely fueling that short interest is a bet that Finisar's recent growth spurt is merely cyclical and once the big network build-out cycle is complete, revenues will fall off, leverage will go away, and the shares go from looking fairly cheap to downright expensive.

Some historical perspective and outlook
To put this into perspective, Finisar reported $948.8 million in sales during fiscal 2011 and record non-GAAP net income of $138 million. In fiscal 2012, revenues inched up slightly, but gross margins declined to 31.9% from 34.8% in the prior year. On top of that, increased operating expenses in the face of an anemic revenue growth picture and lower gross margin drove a substantial loss of leverage.

The good news, though, is that the explosion in data traffic thanks to the rise of mobile devices (which has dramatically juiced up Internet traffic), Internet streaming (particularly as bandwidth improves and higher-resolution video can be streamed), and cloud services doesn't seem anywhere close to over. For example, much of the world still has to transition to 4G LTE from the fairly low 3G data-rates, and developed countries will transition to faster LTE-Advanced and beyond speeds. This secular trend is exceptionally powerful, and while nothing lasts forever, it should have a lot more legs than even the original Internet boom itself.

Fnsr

Source: Finisar.

Foolish bottom line
Finisar is the market leader and is gaining share in a rather compelling secular growth market. While the stock isn't all that far removed from its 52-week highs, this is definitely a stock worth putting on your watchlist. And, should a broad market correction create a buying opportunity in tech equities, Finisar is definitely an interesting way to play the continued explosion in worldwide data traffic.

Leaked: Apple's next smart device (warning -- it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee that its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are even claiming that its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts that 485 million of these devices will be sold per year. But one small company makes this gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and to see Apple's newest smart gizmo, just click here!

Ashraf Eassa has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers