Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...
Shares of optical network equipment supplier Infinera Corporation (NASDAQ:INFN) have disappointed investors mightily over the past year, underperforming the S&P 500 by nearly 30 percentage points -- but one analyst expects that to change soon.
This morning, equity research firm MKM Partners announced it is upgrading Infinera shares from neutral to buy and raising its price target 40%, to $14 per share. The reason: MKM believes that Infinera's new line of next-generation "Infinite Capacity Engine" products will revive sales at the tech company, and lay the groundwork for a 24% surge in stock price.
Here are three things you need to know about that.
1. Infinera's sad story
Infinera reported sales declines of 28% in its most recent quarter, hurt by reluctance among its key telecom customers to spend money on buying new bandwidth. Instead, says Infinera CEO Tom Fallon, Infinera's customers "are squeezing as much out of current network as possible even as bandwidth demand continues to grow." As a result, Infinera has been unable to report a profit in either of its past two quarters.
2. A light at the end of the tunnel?
The good news is that even a telco can only go so far running on fumes. Eventually, Infinera's customers will run out of wiggle room, and be forced to spend more to increase their capacity. This morning analysts at MKM Partners upgraded Infinera shares in the hopes that that day will be soon in coming.
As MKM argues in a write-up on StreetInsider.com (requires subscription), Infinera has two new products in development that it believes will prove popular with telcos -- ICE4 optical engine-powered products CX2 and XT-3300. MKM expects Infinera to begin marketing these products as early as Q3 of this year (i.e., next quarter). Once they are on the market, MKM predicts that CX2 and XT-3300 will "drive second half results, helping management achieve year over year growth and improve margins."
3. How quickly could Infinera revive?
This is a popular view on Wall Street, where MKM points out that "consensus projections" are for Infinera to grow its H1 revenue 16% sequentially in H2. As for what that means in dollars and cents, well, so far we only have one quarter of H1 data to work with. Namely, Q1, in which Infinera's sales plummeted the aforementioned 28%.
As regards Q2, Infinera gave new guidance last month, which suggests that Q2 could be even worse. According to management, sales will probably be coming in around $180 million -- down 31% year over year. Combined, then, Infinera looks likely to be heading for about a $355 million revenue first half. Growing that number by 16% in H2, as the consensus on Wall Street indicates, would therefore put Infinera at about $410 million in H2. It would thus give the company full-year revenue of $765 million or thereabouts.
What it means to investors
MKM characterizes this likely outcome as a "steep revenue recovery," but from where I sit, it looks more like a 12% revenue decline from the $870 million in sales that Infinera booked last year. That's better than a 28% decline, granted. But it's still not good news -- and this is the optimistic scenario.
Pessimists will want to take note of the fact that even if revenue hits Wall Street's targets this year, analysts still don't think Infinera will earn any profit whatsoever in 2017 -- nor in 2018 or 2019, for that matter.
With Infinera boasting $1.6 billion market capitalization, I'm not sure how much longer investors will be willing to pay so much for a profitless stock -- one with no prospect of turning profitable this decade. Long story short: Infinera's stock is up on today's upgrade, but it may not stay up for very long.