Infinera's (INFN 1.45%) stock recently tumbled after its larger fiber optics peer Ciena (CIEN 1.82%) followed up a solid quarter with bleak guidance. Ciena's revenue rose 2% year-over-year during its third quarter, and its adjusted EPS jumped 49%. Both figures topped Wall Street's expectations, but CEO Gary Smith warned that "COVID-related market dynamics" had throttled its orders and would "adversely impact" its revenue growth "for a few quarters." Ciena expects its revenue to decline 13%-17% year-over-year in the fourth quarter, with "limited visibility" for the foreseeable future.
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Ciena's ominous comments indicated Infinera, which competes against the company in fiber optic network upgrades, would face similar headwinds. Let's see if Infinera will struggle with the same problems, and whether or not its stock -- which hit a 52-week high just a month ago -- could be headed for steeper declines.
The similarities and differences
Current-gen fiber networks provide 100G to 200G speeds across long distances and 400G to 600G speeds across shorter distances. Ciena and Infinera both help telecom companies and enterprise customers upgrade their existing networks without laying down additional fiber.
Many companies will upgrade to 800G connections over the next few years. Ciena, Infinera, and Huawei currently lead this next-gen market, but the tech war is throttling sales of Huawei's solutions outside of China.
Ciena offers a much broader portfolio of optical products and services than Infinera. Ciena also generated 73% of its revenue from the Americas last quarter, compared to Infinera's 58%.
But generally speaking, both companies are driven by the same tailwinds, including rising bandwidth needs and the growth of the data center and cloud markets, and face similar near-term headwinds, including a slowdown in fiber spending throughout the COVID-19 pandemic.
Different near-term outlooks
Infinera and Ciena's latest quarters initially look similar. Both companies grew their revenues by the single digits from a year ago, while their adjusted gross and operating margins expanded year-over-year.
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Infinera attributed its margin expansion to its robust sales of higher-margin 600G products, which offset its sales of slower and lower-margin products. It also cut costs across its sales and marketing, supply chain, finance, and IT teams.
Ciena's margins expanded as it generated a higher percentage of its revenue from existing businesses, which generate higher margins, as opposed to new design wins and projects, which typically generate lower margins. It also exercised tighter cost controls and benefited from lower travel expenses throughout the pandemic.
Infinera expects its revenue to rise 2% year-over-year at the midpoint in its fiscal third quarter, which ends about a month before Ciena's fourth quarter, and for its adjusted margins to continue expanding.
That's a much rosier outlook than Ciena's dire forecast for a double-digit revenue drop in the fourth quarter followed by a multi-quarter slowdown, and suggests Infinera's leaner business model, robust demand for its 600G products, and early orders for its 800G products could buoy its growth throughout the crisis.
Meanwhile, Ciena claims its slowdown reflects a "broad" decline across the rest of the market, and that its industry peers would experience similar headwinds over the next few quarters. However, investors should take note of the crucial differences between Ciena and Infinera.
Infinera could be pulling ahead of Ciena in the 800G race
During Ciena's conference call, CEO Gary Smith claimed its WaveLogic 5 modem was the "only 800 gig solution available in the market" and "in volume production today." That's technically true, since Infinera's potential customers are still testing out its ICE6 products instead of deploying them, but Ciena's management glosses over two crucial details.
First, Ciena's WaveLogic 5 can only achieve 800G speeds across short distances, while Infinera's ICE6 achieved that speed over a distance of 950 kilometers in a test earlier this year. Second, Infinera claims ICE6 can generate savings of up to 25% for network operators against competing 800G products, thanks to its lower cost per bit, lower power consumption per bit, and higher fiber capacity -- which could make it a more appealing choice for cost-conscious carriers.
Infinera's bold claims are gaining a lot of attention. Verizon and Windstream both recently tested Infinera's ICE6 alongside Ciena's solutions, and Stifel analyst John Marchetti recently predicted clared Infinera would gain market share in the 800G market next year, presumably as it pulls ahead of Ciena and gains some of Huawei's former customers.
Why I'm still sticking with Infinera
Ciena's gloomy guidance sank Infinera and other fiber stocks, but I'm not convinced Infinera will trip over the same hurdles as its larger rival. Ciena seems eager to blame COVID-19 and other macro headwinds for its slowdown, yet it's dismissive of competitive threats like Infinera's ICE6.
Meanwhile, Infinera's outlook, which was issued a month before Ciena's, doesn't anticipate a significant slowdown. Therefore, it seems like Infinera's smaller (and arguably more streamlined) business, its strong 600G business, and its upcoming 800G products could enable it to weather the incoming headwinds better than Ciena. I told investors to stick with Infinera in the past, and I believe it's still on track to generate stronger growth next year -- even if its biggest rival paints a gloomy picture for the broader fiber market.
