Infinera's (NASDAQ:INFN) stock more than doubled over the past six months as the optical systems provider demonstrated accelerating revenue growth, expanding gross margins, and a new lineup of products.

I previously nudged investors to accumulate shares of Infinera in August and November, and I still think that this cyclical stock could surge higher in 2020, for five simple reasons.

1. Its acquisition of Coriant

Infinera's core products help carriers boost their network capacities without laying down additional fiber. This market is split into long-haul products, which cover longer distances, and short-range products like metro and DCI (data center interconnect) solutions.

Networking connections across a city.

Image source: Getty Images.

Going into 2018, Infinera was too heavily exposed to the long-haul market, where demand withered as carriers prioritized shorter-range metro and DCI upgrades. To rectify that, it acquired its rival Coriant, which generated more revenue from those short-range markets.

Infinera initially claimed that the acquisition would roughly double its annual revenue, but slashed those forecasts last November. That setback was disappointing, but Infinera's revenue growth over the past four quarters, which have included Coriant, indicate that the combined company is still generating healthy growth:


Q4 2018

Q1 2019

Q2 2019

Q3 2019

YOY sales growth*





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

2. The upcoming 800G cycle

Many analysts are focused on the upcoming ramp up of 5G wireless networks worldwide, but fixed-line networks are equally important for data transfers since they aren't as hindered by cost or distance.

10G networks were standard only a few years ago. Current fiber networks operate at 100G to 200G speeds over long-haul distances, while shorter distance networks operate at 400G to 600G speeds. 600G transmissions are expected to mature next year, followed with a ramp up to 800G in late 2020 and 2021.

This "super cycle" in fiber upgrades will be sparked by the growth of cloud and streaming services. Infinera's products help carriers upgrade their existing networks to meet those capacities -- it already sells a 600G solution, and remains on track to launch its 800G solution in the second half of 2020.

During last quarter's conference call with analysts, CEO Tom Fallon stated that Infinera "will be one of only a very small number of companies delivering 800 gig in 2020." That launch could set a fire under this cyclical stock and spark a fierce rally next year.

A close-up shot of a fiber optic cable.

Image source: Getty Images.

3. Its deal with Fabrinet

Infinera's integration of Coriant will help it cut some costs by eliminating redundancies. However, it's cutting costs even further by moving its production from its own plant in Berlin to Fabrinet's (NYSE:FN) outsourced plant in Thailand. That's why its non-GAAP gross margin expanded both sequentially and annually last quarter:


Q4 2018

Q2 2019

Q3 2019

Gross margin*




Source: Infinera quarterly reports. *Non-GAAP.

Infinera expects that expansion to continue with a gross margin of 34%-36% in the fourth quarter. Its margins will likely keep rising in 2020 as demand for its higher-capacity products accelerates.

4. Huawei's headaches

The bears once claimed that Chinese tech giant Huawei, which offers many of the same network-boosting products as Infinera, would marginalize its smaller rival.

However, the Trump Administration's war on Huawei -- the president has added the company to a trade blacklist, barred government agencies from buying its components, and encouraged other countries to stop buying its products -- is causing carriers to flock to American companies like Infinera and Ciena (NYSE:CIEN) instead. In short, Huawei's pain will likely generate gains for Infinera.

5. Its valuation and takeover potential

After lapping the Coriant acquisition, analysts expect Infinera's revenue to rise 10% next year as its losses narrow toward breakeven levels. However, the stock still trades at less than one times next year's sales, which indicates that it still has plenty of room to run.

Infinera's low valuation and enterprise value of $1.7 billion also make it an appealing takeover target for bigger rivals like Ciena or diversified networking companies like Cisco. Therefore, it wouldn't be surprising if suitors stepped up before Infinera launches its first 800G products next year.

The key takeaway

I started my position in Infinera in August, and I don't plan to sell my shares anytime soon. This small-cap stock is a hidden gem, and there are plenty of catalysts on the horizon which could send it soaring in 2020.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.