Please ensure Javascript is enabled for purposes of website accessibility

Why Shares of NeoPhotonics Crashed Today

By Lou Whiteman – May 16, 2019 at 6:03PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The communications-equipment provider is caught up in the U.S. battle with Huawei.

What happened

Shares of NeoPhotonics (NPTN) lost more than 20% of their value on Thursday as the communications-equipment provider got caught up in the U.S. government's ongoing battle with Chinese telecom equipment giant Huawei Technologies. Huawei is an important customer of NeoPhotonics, and investors were in no mood to hang around to find out what the latest round of the trade war will mean for NeoPhotonics' sales.

So what

On Wednesday, President Donald Trump signed an executive order allowing the U.S. to ban telecommunications gear from countries deemed "foreign adversaries." The order was aimed at Huawei, and as part of the move, the U.S. Commerce Department intends to add the Chinese company to a list of entities engaged in activities that are contrary to U.S. interests.

A cargo container painted to look like the U.S. flag crashes into a container painted to look like the Chinese flag.

Image source: Getty Images.

Once Huawei is on that list, the company would be restricted from buying equipment or licensing technology from U.S. companies. With Huawei representing 44% of NeoPhotonics sales in the fourth quarter, the government's actions could have dire ramifications for $333 million of NeoPhotonics' sales.

Now what

NeoPhotonics had already warned back in March that revenue and earnings could fall short of analyst expectations, but no one had factored in the possibility of sales falling off a cliff. NeoPhotonics' next four customers combined after Huawei represent 41% of total revenue, or just short of what Huawei contributes.

If there's one small shimmer of a bright spot for NeoPhotonics, company CEO Timothy S. Jenks said in March that Huawei's share of NeoPhotonics' revenue is reflective of Huawei's dominant position in the market. Assuming that's so, it's possible that a ban on Huawei gear would just shift demand to other vendors that are also NeoPhotonics customers, lessening the overall impact on the supplier.

There are a lot of "ifs" in that positive scenario. At least on Thursday, investors were more inclined to run for the exits than stay around and see how it all plays out.

Lou Whiteman 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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

NeoPhotonics Corporation Stock Quote
NeoPhotonics Corporation
NPTN

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
327%
 
S&P 500 Returns
105%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/27/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.