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Open Your Eyes to Optical Networking

By Anders Bylund - Updated Apr 6, 2017 at 11:57AM

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Which of these fiber-optic players is the best investment for you?

Optical networking has reached an important milestone: The technology is so ubiquitous that we don't even talk about it. It's like air or water, or like 3G coverage in the Everglades swamps. And that means it's high time to start talking.

Where do we start?
When you discuss data networks on a grand scale, there's no way around a few important names. You've got to at least gloss over what Cisco Systems (Nasdaq: CSCO) and Juniper Networks (Nasdaq: JNPR) are up to at the moment. Cisco is remaking itself into a catch-all solution for the data center, while Juniper muscles in on Cisco's big-iron routing territory. The jury is out on Cisco; Juniper looks like a sensible buy today.

Some of Cisco's and Juniper's massive routers are optical, while others rely on good old copper cabling. But they can't build any optical systems without the proper components, now can they? If you believe that fiber optics is the wave of the future, you have to dig a level deeper than the router makers to find a pure-play investment in this sub-market.

The leader
JDS Uniphase (Nasdaq: JDSU) doesn't sell big and expensive long-haul networking hardware to telecommunications operators, but it does sell optical testing equipment and system components to the brand-name bigwigs.

Its rise to prominence results from a hyperambitious buyout strategy 10 years ago, when JDS spent an incredible $56 billion on two megadeals in a single year to consolidate the optical corner of the networking industry. Then the Internet bubble popped, and Canada's largest company became a largely forgotten small-cap.

Today, JDS is roaring back from the brink of the abyss; the company is back to its acquisitive roots and looking forward to the large-scale network upgrades expected from Verizon (NYSE: VZ) and its ginormous backbone brethren in the next year or two. This is an honest-to-goodness turnaround story in the making.

The others
JDS is not the only provider of optical subsystems. Oclaro (Nasdaq: OCLR) also makes optical components, and boasts similarly bright prospects and an impressive customer list -- some of whom speak Chinese. This stock has swung from one to four CAPS stars (out of five) in just more than six months, making it a real up-and-comer. Finisar (Nasdaq: FNSR) recently gave up the testing game and sold that division to JDS in a $40 million deal, but it remains a strong competitor in components and modules.

Then there's Opnext (Nasdaq: OPXT), with its upstart mentality and penny-stock volatility. If you like to invest in companies while they're small, Opnext could be your optical module manufacturer. Its five-star CAPS rating shows that this small-cap gets big-time respect from your fellow investors.

That's it?
I could go on, but the remaining competitors are nowhere near JDS or even Opnext in scale, operating history, or sheer market power. If you dig into the optical experts I've presented here, and you still can't find a suitable investment thesis, maybe this particular market isn't for you after all.

But if you see voice, data, and video networks growing manifold in the next decade, you're in good company. Easing an optical networking expert or two into your portfolio would give you a more exciting ride than the much larger and more mature all-around networking giants.

Excitement means risk, but it's also a sign of opportunity. Any or all of the stocks I mentioned could break out and hit the big time -- again, in some cases. In today's deal-happy IT sector, there could also be some market consolidation in the cards, with the attendant buyout premiums. In particular, I wouldn't be surprised to see Cisco go vertical yet again and buy out one of its component suppliers. If the networking giant can build server systems, I think anything goes, and there are cost-savings synergies to reap in a combination like that.

Do you have your eye on one of the optical networking specialists? Enlighten us all in the comments box below.

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.

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Stocks Mentioned

Verizon Communications Inc. Stock Quote
Verizon Communications Inc.
$50.79 (-0.55%) $0.28
Cisco Systems, Inc. Stock Quote
Cisco Systems, Inc.
$58.08 (1.97%) $1.12
Viavi Solutions Inc. Stock Quote
Viavi Solutions Inc.
$16.21 (1.06%) $0.17
Finisar Stock Quote
Oclaro, Inc. Stock Quote
Oclaro, Inc.

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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