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Why Some Optical Networking Stocks Crashed Last Month

By Anders Bylund - Feb 6, 2020 at 2:49PM

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Networking stocks with exposure to the Chinese market took a beating in January as the coronavirus emerged.

What happened

Shares of several optical networking component makers fell hard in January 2020, according to data from S&P Global Market Intelligence. Fiber lasers maker IPG Photonics (IPGP -1.27%) fell 11.9%, optoelectronic modules builder NeoPhotonics (NPTN 0.06%) dropped 13.5%, and laser systems specialist Coherent (COHR -0.33%) lost 15% of its market value. Apart from operating in the optical networking sector, these three companies also share a significant business presence in China, which exposed them and their investors to uncertainty around the coronavirus breakout.

A young Asian woman, wearing a surgical face mask, stands next to a busy city street.

Image source: Getty Images.

So what

All three of these optical networking stocks were doing just fine in January until the virus scare kicked off. All of them were also quick to fall by double-digit percentages due to their sizable business interests in China.

Sales to Chinese customers accounted for 37% of IPG's total sales in its most recent earnings report. Nearly half of NeoPhotonics' quarterly revenues used to come from Chinese networking giant Huawei until the U.S. government put a stop to doing business directly with that particular company. NeoPhotonics found workarounds for some of its Huawei exposure, to the point where 37% of its most recent quarter's sales still emanated from Huawei. These two companies will report earnings again over the next couple of weeks, giving investors a fresh view of how deeply the virus outbreak is affecting their business prospects.

Coherent, on the other hand, reported first-quarter results yesterday. The company beat Wall Street's estimates across the board, and management devoted plenty of time in the earnings call to discussing the coronavirus and its business risks.

"The Chinese government's actions, particularly from quarantining individuals in and around major hubs, such as Wuhan, and restricting the opening of businesses, will likely have an impact on our ability to sell our products and service our installed base in impacted areas," said Coherent CFO Kevin Palatnik. "The country is on an extended holiday following the Lunar New Year and until we have people back in the offices, our employees as well as those of customers and suppliers, we won't be able to fully assess what the quarter is going to look like."

A bundle of fiber-optic network fibers, set against dark clouds and thunderbolts.

Image source: Getty Images.

Now what

We'll know more about the coronavirus effects as IPG and NeoPhotonics take the earnings stage, and as scientists learn more about the actual virus. It's a bit early to panic and sell every stock with Chinese exposure, though the situation certainly merits monitoring. Meanwhile, the world at large continues to roll out 5G wireless networks that require high-speed optical connections on the back end.

Call me a dreamer, but I'd like to think that this virus can be controlled without disrupting the world as we know it. Neither SARS, the bird flu, nor the swine flu brought the end of the world, after all. So, high-quality companies in leading-edge growth markets such as Coherent and IPG Photonics could be great buys while their coronavirus-related discounts last. Stoic patience and a certain optimism that things generally work out, in the end, have always been great tools for long-term investors.

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Stocks Mentioned

Coherent, Inc. Stock Quote
Coherent, Inc.
COHR
$266.18 (-0.33%) $0.89
IPG Photonics Corporation Stock Quote
IPG Photonics Corporation
IPGP
$93.27 (-1.27%) $-1.20
NeoPhotonics Corporation Stock Quote
NeoPhotonics Corporation
NPTN
$15.69 (0.06%) $0.01

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

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