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Why NeoPhotonics Stock Tumbled Today

By Timothy Green – Apr 25, 2018 at 1:12PM

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The U.S. Department of Justice is reportedly investigating the company's biggest customer.

What happened

Shares of NeoPhotonics (NPTN) slumped on Wednesday, potentially due to news that Chinese company Huawei was under criminal investigation for violating U.S. sanctions related to Iran. Huawei is NeoPhotonics' top customer. This comes less than two weeks after the U.S. Department of Commerce banned the sale of components to ZTE Corp. for reasons related to the company's violation of the Iran sanctions. Shares of NeoPhotonics were down about 7.4% at 12:10 p.m. EDT, after being down as much as 11.9% earlier in the day.

So what

The U.S. Department of Justice is reportedly investigating if Huawei violated U.S. sanctions against Iran, according to The Wall Street Journal. It's unclear at this time how far the investigation has progressed, and the exact allegations being explored.

A man with his head down on a table with a slumping chart in the background.

Image source: Getty Images.

The U.S. Department of Commerce banned the sale of components to ZTE Corp. earlier this month due to the company violating the agreement it struck after pleading guilty to violating sanctions against Iran. Companies that depend on ZTE for a large portion of their revenue, including Acacia Communications, saw their stocks crumble.

NeoPhotonics issued a press release on April 17 saying that just 5% of its annualized revenue would not be realized due to the ZTE ban. A similar action against Huawei, however, would be catastrophic. In 2017, Huawei accounted for 40% of NeoPhotonics' revenue.

Now what

The best-case scenario for NeoPhotonics is for this criminal investigation of Huawei to yield no major actions from U.S. authorities. The worst-case scenario is a ZTE-style ban that vaporizes 40% of its annual revenue. That's certainly within the realm of possibility, but it's too early to tell at this point how worried NeoPhotonics shareholders should be.

Timothy Green has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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