Infinera (NASDAQ:INFN) stock recently dipped after the provider of optical solutions posted mixed fourth-quarter numbers. Its adjusted revenue fell 8% year-over-year to $354.4 million, which was within its own guidance range but missed analysts' estimates by $2.4 million.

However, Infinera's adjusted gross and operating margins expanded, and its adjusted net income more than quadrupled to $26.3 million, or $0.13 per share, which beat expectations by $0.11.

For the current quarter, Infinera expects its adjusted revenue to stay roughly flat year-over-year. It didn't provide any bottom-line guidance, but it expects its adjusted gross and operating margins to continue expanding year-over-year.

Infinera's top-line growth might seem unimpressive, but investors should focus on its expectations for accelerating revenue growth in the second half of the year.

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Infinera's next growth cycle hasn't started yet

Infinera's optical products enable carriers to upgrade their connection speeds without laying down additional fiber. It does this by splitting existing optical signals across additional wavelengths.

Current-generation fiber networks transfer data at 100G to 200G speeds across long distances, and 400G to 600G speeds across shorter distances. Many carriers are currently testing out 800G connections.

Infinera, Ciena, and Huawei are the three major players in the 800G space. Huawei was once considered a major threat, but blacklists and sanctions against the Chinese tech giant have caused many carriers outside of China to stick with Infinera or Ciena instead.

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Ciena is much larger than Infinera, but most carriers don't want to put all their eggs in one basket. That's why Verizon has been running 800G tests with Ciena's WaveLogic 5 products and Infinera's ICE6 products. Infinera has been signing on more ICE6 customers, but it doesn't expect them to ramp up their orders and upgrades until the second half of 2021.

Until then, Infinera will phase out its older products, lock in more customers with its high-end 600G products, and invest in newer technologies like XR optics, which reduces the costs of transferring data across 5G networks, cloud services, and wireline networks.

In short, it would be foolish for investors to abandon Infinera right before it starts to generate meaningful revenue growth from its ICE6 products later this year. That's why analysts expect the company's revenue to rise 6% in fiscal 2021 and another 9% in 2022.

They also expect Infinera to post a full-year adjusted profit in 2021, compared to a net loss in 2020, and for its earnings to jump nearly sixfold in 2022. Based on those estimates, Infinera trades at 24 times forward earnings and just 1.2 times next year's sales.

Infinera's core business is still healthy

Infinera's revenue declined in the fourth quarter as soft demand for its current-gen products among large North American service providers offset its strong overseas growth. During the conference call on Feb. 23, CEO David Heard said those trends were "generally consistent with our expectations."

That trend won't reverse until the second half of the year, but Infinera's expanding gross and operating margins indicate it easily withstood the pandemic-related disruptions throughout 2020.

Period

Q4 2019

Q1 2020

Q2
2020

Q3 2020

Q4 2020

Gross margin

35.2%

28.3%

33.8%

35.2%

37.6%

Operating margin

2.3%

(9.4%)

(1.8%)

2.2%

6.6%

Numbers are non-GAAP. Data source: Infinera.

The growth of Infinera's higher-margin 600G products and services, the expansion of its vertically integrated products, and tighter cost controls all boosted its margins while offsetting its higher supply chain and logistics costs.

Meanwhile, Infinera continued to expand its customer base. It gained 32 new 600G customers in 2020, added 28 new XTM (short-range metro) customers, and increased its compact modular Groove GX revenue nearly 40%. In other words, Infinera's core businesses remain steady as it sets the foundations for its next growth spurt.

The bottom line

Investors should focus on Infinera's growth in the second half of 2021 instead of the short-term noise. Those who keep their eye on the ball could be well-rewarded with some big gains over the next two years.

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.