Infinera's (INFN 1.84%) stock recently dipped after the optical solutions provider posted its third-quarter numbers. Its adjusted revenue rose 4% year over year to $341.2 million, beating estimates by $5.3 million.

On the bottom line, Infinera generated an adjusted net profit of $4.2 million, or $0.02 per share, which cleared expectations by eight cents and marked a big improvement from its loss of $0.17 per share a year earlier.

Infinera's headline numbers looked solid, but they didn't seem to dazzle investors. However, its stock has still advanced about 30% over the past 12 months, and I believe it could head higher, for four simple reasons.

A close-up shot of an optical networking cable.

Image source: Getty Images.

1. A secular growth story

Infinera's optical equipment enables carriers to boost the capacity of their existing networks without laying down additional fiber. Current generation fiber networks transfer data at 100G to 200G speed across long distances, and 400G to 600G speeds across shorter distances.

Many carriers plan to upgrade to 800G connections over the next few years. Infinera and its larger competitors Ciena (CIEN 0.72%) and Huawei are currently the market leaders in the 800G market.

During Infinera's latest conference call, CEO Tom Fallon declared the company was "one of only two commercially viable vendors capable of delivering 800-gig and greater solutions in the near term, a stark contrast to the numerous suppliers addressing earlier generations of optical solutions."

An ethernet cable on top of a laptop keyboard.

Image source: Getty Images.

That statement suggests that Huawei -- which is besieged by the trade war, U.S. sanctions, and national security concerns -- will lose the non-Chinese 800G market to Infinera and Ciena. Infinera's ICE6 800G solutions are already being tested by big carriers like Verizon (VZ -0.53%), and it could gain more customers as Huawei's global influence wanes.

Infinera still generates most of its revenue from its current-gen 600G solutions and older products. But David Heard, who will succeed Tom Fallon as Infinera's CEO by the end of the year, noted that the ICE6 platform "remains on track" to start deliveries in the fourth quarter. Heard also expects a "more meaningful positive impact" from ICE6 to "begin in the second half of 2021."

In other words, Infinera still hasn't fired up its biggest growth engine yet. But when it does, its growth should accelerate as the secular tailwinds kick in.

2. Expanding margins

Infinera's adjusted gross margin expanded 210 basis points year over year, and 140 basis points sequentially, to 35.2% in the third quarter -- which was near the top of its prior guidance of 32.5%-35.5%.

It also posted a positive adjusted operating margin of 2.2%, compared to a negative operating margin of 5.7% a year ago, and a negative operating margin of 1.8% in the second quarter.

Infinera attributed its margin expansion to robust sales of its higher-margin 600G products, ongoing cost-cutting measures, and operational improvements in its supply chain and fulfillment network.

Infinera expects that expansion to continue in the fourth quarter, with an adjusted gross margin of 35.5% at the midpoint and an adjusted operating margin of 3%. That bullish forecast indicates Infinera's pricing power remains healthy across its current markets and should remain strong as it rolls out its ICE6 products.

3. Healthy guidance and long-term forecasts

Infinera expects its adjusted revenue to dip 8% year over year (at the midpoint) in the fourth quarter. That slowdown isn't surprising, since shipments of Infinera's older products should decelerate as it ramps up its ICE6 shipments.

That guidance implies Infinera's full-year revenue will rise 3%, compared to roughly flat revenue growth for the broader optical industry, and its expanding margins should boost its profits.

Analysts expect Infinera's adjusted revenue to rise 3% for the full year with a narrower adjusted net loss. Next year, they expect Infinera's revenue to rise 8%, with an adjusted profit of $0.11 per share.

4. It's fundamentally cheap

Infinera's stock might initially seem expensive at about 60 times next year's earnings, but that multiple could cool off as its profitability improves. In terms of revenue, it looks dirt cheap at 0.9 times next year's sales.

By comparison, Ciena trades at 14 times forward earnings but 1.8 times next year's sales. Infinera's low enterprise value of $1.7 billion also makes it a tempting takeover target for Ciena, which could dominate the 800G market outside of China with a single deal.

The bottom line

In a frothy market filled with bubbly tech stocks, Infinera stands out as a solid secular growth play with a market-leading product and a low valuation. This stock won't blast off overnight, but it could head significantly higher next year as its ICE6 products start generating more meaningful revenue.