Shares of Infinera (INFN 2.12%) have rallied 45% this year, even though the optical transport solution provider has posted three straight quarters of double-digit revenue declines. That's because many investors believe that Infinera's main long-haul wave division multiplexing (WDM) business will rebound in the second half of the year.

That makes Infinera seems like a good turnaround play on the fiber "super cycle", in which the soaring use of streaming media, cloud storage, and other data-intensive tasks forces carriers to upgrade their networks. But there are also major flaws in that thesis. Let's discuss the five major issues that Infinera bulls should be worried about.

Fiber optic and ethernet cables.

Source: Getty.

1. The cyclical downturn in its long haul business

Infinera mainly sells long-haul WDM and subsea optical transmission systems, which help carriers boost the capacity of their networks over long distances without laying down additional fiber. This is accomplished by "multiplexing", or sharing, a large number of optical signals across a single fiber with different wavelengths of light.

Demand for Infinera's long-haul systems plummeted over the past year as its customers invested in shorter-range metro connections and DCI (data center interconnect) systems which link data centers to each other. Bigger telcos in the U.S. were also more focused on expanding their digital ecosystems instead of boosting the capacity of their networks.

Infinera believes the long-haul market will warm up in the second half of 2017, but it hasn't reported the growth to support those claims yet. It also sells metro and DCI systems, but those businesses are still too small to offset its ongoing long-haul declines.

2. A growing list of competitors

Many bulls believe that Infinera's proprietary photonic integrated circuit (PIC) manufacturing process gives it a cost advantage against its competitors, which include Ciena (CIEN 0.83%) and Acacia Communications (ACIA). Unfortunately, Infinera's trailing 12-month gross margin is actually lower than Ciena and Acacia's.

CIEN Gross Profit Margin (TTM) Chart

Source: YCharts

That's likely because Ciena's business is diversified across multiple networking-related markets, and Acacia generates more revenue from the faster-growing metro and DCI markets. Acacia's 400G chipsets are also smaller, denser, and more power-efficient than those produced by Infinera's PIC process.

That's why consulting firm Fiber Reality recently claimed that any cost advantages that Infinera's PIC process had were now "totally countered by its limitations". Acacia also sells long-haul systems, which could throttle Infinera's recovery in that key market.

3. Stalled growth in Asia

Many fiber companies are looking toward Asian markets, particularly China, for future growth. That makes sense, since internet penetration rates remain low across Asia (just 52% in China) compared to other regions.

Unfortunately, that market is also filled with tough Chinese competitors like Huawei and ZTE, which often undercut their overseas rivals to grow their market share. As a result, Infinera's revenue from its Asia Pacific and Japan region surged 77% in fiscal 2015, but fell 1% in 2016 as market demand flattened and its rivals gained ground.

4. Its lack of profitability

Infinera has posted non-GAAP losses for two straight quarters, and analysts expect it to finish fiscal 2017 with a loss of $0.44 per share, compared to net earnings of $0.34 in 2016. Its GAAP losses look even worse.

Wall Street expects the recovering long haul WDM market to boost Infinera's non-GAAP earnings back into the black in fiscal 2018. However, a delayed market recovery, slipping margins, and tougher competition from Ciena, Acacia, Huawei, and others could make it very tough for Infinera to mount a comeback.

5. A lack of insider confidence

If Infinera is truly headed for a second-half recovery, I'd expect insiders to be buying the stock. But over the past three months, insiders sold over 115,000 shares. Over the past 12 months, insiders sold nearly 230,000 shares and bought 182,000 shares.

Insiders have plenty of reasons to sell their shares, but they could also be cashing out on Infinera's unjustified rally earlier this year.

The key takeaways

Infinera might be a turnaround play, but I don't think the rewards outweigh the risks. I believe that it's smarter to buy Ciena, which is better diversified and consistently profitable; or Acacia, which has newer technology and better exposure to the metro and DCI markets.