Infinera's (NASDAQ:INFN) stock recently hit a 52-week high after the optical solutions provider's second quarter numbers topped Wall Street's expectations. Its adjusted revenue rose 8% annually to $332.6 million, beating estimates by $14 million.

Its adjusted net loss narrowed from $42 million to $17.2 million, or $0.09 per share, which also cleared expectations by a nickel. On a GAAP basis, its net loss also narrowed from $113.7 million to $61.6 million.

At first glance, Infinera's growth seems unremarkable: Its revenue growth decelerated and it remains unprofitable. However, several key improvements brought back the bulls. Let's examine those catalysts and see if its stock is worth buying after its post-earnings pop.

A close-up shot of a fiber optic cable.

Image source: Getty Images.

Understanding Infinera's business

Infinera's solutions help carriers increase the capacity of their existing networks without laying down additional fiber.

Current fiber networks provide 100G to 200G speeds over long distances, and 400G to 600G speeds over shorter distances. Many carriers will upgrade to 800G connections in late 2020 and 2021. Infinera and its larger rivals Ciena (NYSE:CIEN) and Huawei currently lead this next-gen market.

Infinera previously generated most of its revenue from long-haul solutions instead of shorter-range solutions, but it suffered when many carriers prioritized shorter-range upgrades over longer-range ones. To rectify that balance and increase its scale, it acquired its rival Coriant in late 2018.

Robust revenue growth and expanding margins

Infinera's 8% revenue growth in the second quarter hit the top range of its own forecast for 1% to 8% growth. Its gross and operating margins also expanded sequentially and annually:

Metric (Non-GAAP)

Q2 2019

Q3 2019

Q4 2019

Q1 2020

Q2 2020

Revenue Growth (YOY)

47%

63%

15%

12%

8%

Gross Margin

30.7%

33.1%

35.2%

28.3%

33.8%

Operating Margin

(12.3%)

(5.7%)

2.3%

(9.4%)

(1.8%)

Data source: Infinera quarterly reports. YOY = year-over-year. 

Infinera's revenue growth might seem slow compared to the previous year, but investors should remember it lapped the Coriant acquisition at the end of 2019.

Servers in a data center.

Image source: Getty Images.

During the last conference call, CEO Tom Fallon attributed its revenue growth to the higher adoption of "bandwidth intensive applications like 5G" and a growing need to "move massive amounts of data across long distances." Fallon also noted that Infinera was seeing "tangible opportunities emerge" as carriers curbed their dependence on Huawei's hardware.

Infinera's product mix also improved, as shipments of its higher-margin 600G products offset its shipments of lower-margin products. The ongoing deployments of new 5G networks boosted demand for its XTM platform and DRX 30 "white box" router deployments.

Infinera also continued cutting costs across its sales and marketing, supply chain, finance, and IT teams. Those operational improvements lifted its margins, offset a slight compression from pandemic-related disruptions of its supply chain, and narrowed its GAAP and non-GAAP losses.

But the real catalyst lies ahead

Infinera expects its adjusted revenue to rise 2% annually at the midpoint in the third quarter. It also expects its non-GAAP margins to continue expanding, with midpoint forecasts for a gross margin of 34% and an operating margin of negative 1%.

That growth seems stable, but the real catalyst is its upcoming rollout of 800G ICE6 products in the second half of the year.

Verizon (NYSE:VZ) already tested out Infinera's ICE6 upgrades on its fiber network, and it's expected to split its 800G contracts between Infinera and Ciena. Other carriers could follow Verizon's lead, and Infinera could win over carriers that want to replace Huawei's equipment amid national security and trade concerns.

Infinera is also changing its leaders ahead of that expansion: COO David Heard will succeed Tom Fallon, who will remain on the board, by the end of 2020. Chairman Kambiz Hooshmand will also step down by the end of the year. That shakeup might placate big investors like Oaktree Capital, which has repeatedly pushed Infinera to pursue fresh growth strategies.

Should you buy Infinera?

I urged investors to buy Infinera last August, when the stock was trading at about $4.50 per share. I also told investors to stick with the stock after its messy quarter in May. My own position in Infinera is up over 80% following its post-earnings pop, and I don't plan to sell my shares anytime soon.

Infinera didn't provide exact guidance for the full year, but analysts expect its revenue to rise 4% this year and 9% next year. It's also expected to post a narrower loss this year before achieving profitability in 2021.

That's a bright outlook for a stock that trades at just over one times next year's sales. Infinera's stock still looks cheap relative to its growth, so it's definitely not too late to buy shares of this rebounding stock before the 800G tailwinds kick in.

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.