Infinera's (NASDAQ:INFN) stock more than tripled over the past two years as the optical solutions company turned around its struggling business.

Infinera's products help carriers increase the bandwidth of their existing networks without laying down additional fiber. It generated most of its revenue from long-distance solutions back in 2018, but carriers at the time preferred to upgrade their shorter-range data center and metro networks instead.

Infinera addressed that imbalance by buying Coriant, which provided more shorter-distance technologies, in late 2018. However, Infinera initially overestimated Coriant's contribution to its top line, and its stock tumbled below $3 per share during the summer of 2019.

A frayed fiber optic cable.

Image source: Getty Images.

Infinera's business eventually recovered as it integrated Coriant, sold more short-distance products, and benefited from the cyclical recovery of the long-distance market. It also introduced its new line of ICE6 800G solutions, which will help carriers upgrade their current-gen 400G to 600G networks.

Infinera's revenue rose just 3% last year, and it posted an adjusted net loss. But this year, analysts expect its revenue to rise 5% with a return to profitability. Next year they expect its revenue and earnings growth to both accelerate. The main catalyst will be its 800G solutions, which could hold a near-duopoly in the nascent market with Ciena (NYSE:CIEN) as sanctions restrict Huawei to China and a handful of other countries.

Infinera's stock, which trades at 28 times forward earnings and just 1.4 times this year's sales, seems like a worthy buy based on these facts alone. However, the company just gave investors four additional reasons to buy its stock during its latest investor day presentation.

1. Outpacing the optical market

Infinera predicts the total optical market will grow at a CAGR of 2%-3% between 2020 and 2025. Infinera mainly operates in two parts of the industry: open optical solutions, which include compact modular platforms; and coherent optical solutions, which include its aforementioned 800G products.

By 2025, Infinera expects to control 40%-45% of the open market and 85%-90% of the coherent market. It expects the open market to grow three to four times faster than the total optical market, and for the coherent market to grow two to three times as fast.

2. Significant improvements through 2025

Based on those estimates, Infinera expects its total revenue to grow at a CAGR of 8%-12% between 2020 and 2025. As seen in this chart, it expects its 800G products to drive its core growth, its 400G modular products to support its metro growth, and its 100G products to expand across edge networks.

Chart of Infinera's long-term goals.

Image source: Infinera.

Infinera also expects its gross margin to hit the mid-40s by 2023, with a double-digit operating margin. By 2025, it expects its gross margin to reach 47%-50%, with an operating margin in the mid-teens.

By comparison, Infinera's non-GAAP gross margin expanded 20 basis points to 33.8% in 2020, and it posted a negative non-GAAP operating margin of 0.5%, compared to a negative operating margin of 6.3% in 2019.

3. Vertically integrating most of its businesses

Infinera plans to boost its margins by vertically integrating about 60% of its products by 2023, up from only 40%-45% this year. It expects that percentage to rise to about 70% by 2025.

That vertical integration should eliminate its redundancies, cut costs, and enable it to compete more effectively against Ciena, which still generates more than twice as much revenue as Infinera.

4. Advancing into new markets

Infinera's near-term growth relies heavily on its 800G products, but it also expects to "create" a new $1-$2 billion market with its XR (point-to-multipoint) optical solutions over the next few years.

XR solutions replace the traditional "hub and spoke" model, wherein devices that operate at different speeds across a network (the "spokes") connect to network hubs. This model is inefficient because lower-bandwidth spokes can be paired with higher-bandwidth hubs -- which wastes the leftover bandwidth.

In an XR model, each spoke is paired with a hub at the same speed, which ensures all of a carrier's bandwidth is efficiently used without lower-bandwidth spokes occupying higher-bandwidth hubs.

Infinera claims this new technology is superior to existing point-to-point solutions, such as Ciena's ZR and ZR+ architectures, and each XR installation could "deliver CapEx savings of up to 80%, power savings in excess of 80%, and space savings in excess of 90%" at a carrier's hub site.

That's a bold claim, but it could help Infinera's coherent business achieve its target of growing two to three times as fast as the broader optical market.

Patience will pay off

I bought my entire position in Infinera back in 2019 at just below $5 a share. I'm sitting on a gain of nearly 100% today, but it would be foolish to sell this stock right before its long-term growth engines kick in. Therefore, I plan to hold my shares for at least a few more years -- this stock could be worth a lot more if Infinera achieves its ambitious long-term goals.

 
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.