Shares of Infinera (NASDAQ:INFN) jumped 15% on Thursday after the optical systems provider posted its second-quarter earnings.

Its adjusted revenue, boosted by its acquisition of Coriant, rose 47% annually to $306.9 million and topped expectations by $6.5 million. Its adjusted net loss widened from $1.3 million to $42 million, or $0.24 per share, but still beat estimates by four cents.

For the third quarter, the vertically integrated manufacturer of optical networks expects its adjusted revenue to rise 60%-70% annually (4%-11% sequentially), and for its loss to narrow sequentially to $0.19-$0.15 per share.

That forecast indicates that this cyclical stock has turned a corner, but it's still down nearly 50% over the past 12 months. Should investors consider buying some shares of Infinera, which trade at less than one time this year's sales?

Network connections across a city.

Image source: Getty Images.

Understanding Infinera's business strategy

Infinera generates most of its revenue from long-haul wave division multiplexing (WDM) systems, which let service providers boost the capacities of existing networks without laying down more fiber optic cable. A smaller percentage of Infinera's sales come from Metro WDM and data center interconnect (DCI) systems, which achieve similar results over shorter distances.

Many bulls once considered Infinera to be an ideal "super cycle" play on the growth of streaming media and cloud services since the expansion of those two segments would push service providers to boost their network capacities.

But that enthusiasm waned for two reasons: First, service providers started prioritizing short-range upgrades like Metro WDM and DCI systems over the long-haul systems that generated most of Infinera's sales. Second, orders from China fell as service providers reined in their spending.

As a result, Infinera's double-digit sales growth in the first half of 2018 decelerated to just 4% growth in the third quarter of 2018. To offset that slowdown, Infinera acquired Coriant, an industry peer that focuses more on short-range systems, for $430 million in cash and stock last October.

A closeup of a fiber optic cable.

Image source: Getty Images.

Infinera initially claimed that buying Coriant would roughly double its annual revenue, but it dialed back those expectations last November. Here's how much Coriant actually boosted Infinera's revenue in the three quarters since the deal closed.

Period

Q4 2018

Q1 2019

Q2 2019

YOY sales growth*

72%

46%

47%

YOY = Year-over-year. Source: Infinera quarterly reports. *Non-GAAP.

That's a rough start, especially since the Coriant deal is also weighing down Infinera's margins, cash flow, and earnings. That's why it wasn't surprising when Infinera's gross margin plunged both sequentially and annually in the second quarter:

Period

Q2 2018

Q1 2019

Q2 2019

Gross margin*

43.9%

35.3%

30.7%

Source: Infinera quarterly reports. *Non-GAAP.

Better news going forward

Infinera's past performance was spotty, but its forecast for 60%-70% sales growth with a non-GAAP gross margin of 32% (plus or minus 200 basis points) in the third quarter indicates that its synergies with Coriant -- which reduce its customer concentration while boosting its scale and exposure to higher-growth short-range markets -- are finally kicking in.

Furthermore, Infinera is seeing orders for its long-haul WDM products pick up again with bigger orders from top customers, and it's pivoting its production from its Berlin center to Fabrinet's (NYSE:FN) lower-cost plant. It's also implementing cost-cutting measures, which are expected to reduce its non-GAAP operating expenses and cost of goods sold by about $160 million this year.

Infinera is also still developing next-gen modules, like its new ICE6 DS, for even higher-capacity networks. The recent scrutiny of Huawei, which offers solutions similar to those of Infinera, is also prompting some service providers to replace their Huawei products with Infinera's.

Infinera believes that its improving sales, widening margins, and synergies with Coriant will lift its free cash flow and non-GAAP profits back to positive levels by the fourth quarter. If that happens, Infinera could be very cheap at these levels.

A solid buy with plenty of catalysts

Infinera expects its revenue to rise about 37% this year to $1.3 billion, but it trades at just 0.6 times that figure. For context, its much larger rival Ciena (NYSE:CIEN), which is diversified across more industries, trades at roughly twice this year's sales but is only expected to generate 14% sales growth.

Ciena might still be more appealing to conservative investors since it's firmly profitable and trades at just 18 times forward earnings. Infinera, however, could have more upside potential than Ciena once more of its catalysts kick in.