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These 3 Optical Networking Stocks Are Ridiculously Cheap

By Anders Bylund - Updated May 29, 2018 at 5:02PM

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The issues weighing on fiber optic networking stocks are many and varied, but they all seem to be of the short-lived variety.

The optical networking sector has fallen on hard times lately. Many stocks in this category skyrocketed in 2016 and early 2017, only to come crashing back down.

There is no doubt in my mind that high-speed network equipment and components will be in high demand for many years to come. That's why I'm salivating over the rock-bottom prices that some of the best names in the industry are trading for right now. So, let's have a closer look at Finisar (FNSR), Applied Optoelectronics Inc. (AAOI 0.65%), and NeoPhotonics (NPTN -0.19%), all of which have seen share prices sliding at least 20% lower over the last 52 weeks. These are great companies in a high-growth industry with legs that are good for miles and miles, and they should be snapped up at these ridiculously low prices.

A bundle of fiber-optic networking cables set against storm clouds and a lightning bolt.

Image source: Getty Images.

Finisar

Finisar's stock price has plunged 32% over the last year. The drop was partly triggered by disappointing optical equipment orders, but Apple (AAPL 1.62%) played a larger role in this drama.

Apple uses Finisar 3D-sensing arrays to power the iPhone's TrueDepth camera and the proximity-sensing features of the wireless AirPods earbuds. So when Apple showed a weak iPhone hand in January, Finisar's share price plunged. But Finisar is shipping its so-called VCSEL sensors as fast as it can make them, and Apple's order volume is not a limiting factor there, so that's not a terribly valid reason for Finisar's sliding stock price. When Apple sneezes, its component suppliers catch the flu -- with or without sensible support from the actual business case.

The company's management sees much larger end markets for VCSEL sensors than just Apple's smartphones with face recognition features. Cupertino just happens to be a pretty sweet early contract for this bleeding-edge technology.

While waiting for the VCSEL market to mature, Finisar is also a leading supplier of high-speed fiber optic transceivers and ROADM connection cards. Both of these markets are currently champing at the bit and ready to explode when telecoms around the world finally start to roll out next-generation 5G wireless networks. These ultra-fast systems will require huge bandwidth feeds on the back end, hooking up wireless towers and small-cell arrays to the internet at large. Finisar is not the only fiber optic specialist that will benefit from that groundswell, but it's certainly on that list.

And the dramatic drop in Finisar's share price has led to a frugal price-to-earnings ratio of just 13.9 times trailing earnings or 1.4 times trailing sales. That's a steal for investors who are willing to wait for the 5G and VCSEL catalysts to kick in -- and who can ride out some rough seas until Finisar reaches that destination.

Applied Optoelectronics Inc.

Data center networking specialist Applied Optoelectronics (AOI) rode a big wave in early 2017 thanks to massive orders from leading customers Amazon.com (AMZN 3.15%) and Facebook (META -0.76%). But it came crashing back down when the same clients tapped the brakes on their infrastructure upgrade plans. All in all, AOI investors have endured a 51% haircut in 52 weeks.

Neither one of these huge customers are planning to stop investing in high-speed networks anytime soon. Nor is AOI losing market share in these accounts in the long haul. In fact, several rivals are reportedly using generous pricing discounts to have a fighting chance at competing with AOI's top-quality transceivers.

No, Facebook and Amazon are simply taking their time to do proper component testing and network planning before launching into their next big fiber optic order surges. AOI and others recently introduced new transceivers and networking lasers at double the bandwidth of the last round, and another big leap is planned in 2019. Doing these upgrades right can be tricky when you run data centers on a grand scale, so AOI and its investors must simply live with these order delays until the infotech giants get their ducks in a row.

Like Finisar, Applied Optoelectronics is really just waiting for another swing in a highly cyclical industry. That patience should be rewarded within the next three or four quarters, and the bounce could also start sooner than that.

NeoPhotonics

Here's a game of international intrigue on a high level. NeoPhotonics makes optoelectronic networking modules and systems, and most of its orders come from China. In 2017, 40% of the company's total revenues came from Chinese networking giant Huawei, while smaller peer ZTE accounted for another 5%. All told, 55% of NeoPhotonics' revenue last year was based on Chinese orders.

That heavy dependence on China turned into a liability when Beijing and Washington started rattling sabers over their international trade relations. Along the way, ZTE was slapped with heavy-handed sanctions that stopped the company from using American technologies for the next five years, effectively putting that company out of business. NeoPhotonics issued a press release explaining how small ZTE's revenue impact really was. But investors worried about the ZTE action leading up to similar sanctions on Huawei someday soon. That would be terrible news for NeoPhotonics. So the stock plunged.

But the tenor of U.S.-China relations quickly changed when President Trump said that he wanted to save ZTE's business by modifying the company's sanctions. In that light, Huawei no longer looks like a target for huge regulatory actions, so NeoPhotonics investors have relaxed their attitudes against the stock. The share price has soared 33% higher in May.

On top of that, rumor has it that NeoPhotonics is looking for a buyer, and Finisar might be ready to launch a buyout bid for the company. Stay tuned for more on that potential drama, which could unlock a lot of shareholder value in a hurry.

The stock still trades 26% below its year-ago price, but the bottom of the bounce may be in the rearview mirror already.

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Stocks Mentioned

Apple Inc. Stock Quote
Apple Inc.
AAPL
$138.93 (1.62%) $2.21
Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$109.56 (3.15%) $3.35
Meta Platforms, Inc. Stock Quote
Meta Platforms, Inc.
META
$160.03 (-0.76%) $-1.22
Finisar Stock Quote
Finisar
FNSR
NeoPhotonics Corporation Stock Quote
NeoPhotonics Corporation
NPTN
$15.70 (-0.19%) $0.03
Applied Optoelectronics, Inc. Stock Quote
Applied Optoelectronics, Inc.
AAOI
$1.56 (0.65%) $0.01

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