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What's Holding Finisar Corporation Back?

By Nicholas Rossolillo – Apr 10, 2018 at 9:15AM

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New use for fiber optics and components could change the company’s fortunes, but investors should pause before buying in.

Since undergoing a merger with Optium Corporation back in 2008, shares of optic communications company Finisar Corporation (FNSR) have floundered. An impressive rally mounted beginning in 2016 as the company's products were in high demand, but that momentum fizzled out last year. Finisar may have some promising things in the works, but a few areas of concern are holding this one back from greatness.

What does Finisar do?

Finisar is a manufacturer of fiber-optic system components and other related devices that enable video and data communications, networking, storage, and wireless technologies. The company breaks its revenue into two segments: telecom and datacom products.

There has been optimism surrounding the latter segment as it contains Finisar's VCSEL technology, a laser emitting chip crucial to 3-D sensing technology, powering features like facial recognition on Apple's (AAPL -4.91%) iPhone X and other high-end smartphones. The prospect of becoming a supplier to the lucrative smartphone market is enough to grab some attention.

In anticipation of demand, the company has been building new facilities for the production of its VCSEL chips. However, recent trends make those moves look less lucrative than some may have hoped at first.

An artist's rendition of data getting connected all over the globe.

Image source: Getty Images.

Finisar giveth and taketh away

Finisar's line of work is highly cyclical, with demand for components fluctuating depending on factors like seasonality and investment in new infrastructure from bigger companies that Finisar supplies. Added to that problem is the fact that just 10 customers made up 63% of Finisar's revenue in its last reported quarter. If only one of those customers -- Apple, for example -- reduces the size of its orders, it can have an adverse effect on Finisar. 

These problems became apparent as of late when demand started to ebb, especially in the telecom segment. Even the VCSEL business slowed down, and Finisar management recently said it is selling nowhere near the number of VCSEL devices it thought it would. It all added up to a rough stretch for the stock over the last year.

Period

Change in Telecom Products Revenue (YOY)

Change in Datacom Products Revenue (YOY)

2016

5.2%

(0.5%)

2017

(22%)

12.1%

Q1 fiscal year 2018

(8.1%)

(3.1%)

Q2 fiscal year 2018

(9.5%)

(0.7%)

Q3 fiscal year 2018

(12.3%)

3.7%

Chart by author. Data source: Finisar quarterly earnings. YOY = year over year.

The good news is that the sliding telecom business is the smaller of the two; datacom made up 77% of revenue at last report. However, there's lots of competition out there, even for the up-and-coming VCSEL technology. Lumentum has also succeeded in getting some of its VCSEL chips into smartphones.

Finisar isn't alone with these issues. The whole optics industry has had a bad 2017, including former darling Applied Optoelectronics. The problem is that many of these optics manufacturers are not maximizing their production capacity, so when demand suddenly declines, revenue and profits tank.

What that means for investors is that it's hard to get too excited about Finisar stock. Perhaps its fortunes will turn in the near future, but the chances this one will make big money for investors look slim at this point.

Nicholas Rossolillo and his clients own shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Finisar Stock Quote
Finisar
FNSR
Apple Inc. Stock Quote
Apple Inc.
AAPL
$142.48 (-4.91%) $-7.36
Applied Optoelectronics, Inc. Stock Quote
Applied Optoelectronics, Inc.
AAOI
$2.66 (-9.83%) $0.29
Lumentum Holdings Inc. Stock Quote
Lumentum Holdings Inc.
LITE
$69.49 (-1.89%) $-1.34

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