Networking stocks should be simple. Worldwide network traffic will continue to explode for the foreseeable future, driven by fatter and more ubiquitous bandwidth needs. Thank Apple (Nasdaq: AAPL) for introducing media players that fit in your pocket or purse; thank Google (Nasdaq: GOOG) and Netflix (Nasdaq: NFLX) for burning the fires under traffic-sucking video streams.
So yeah, it should be simple. Demand is guaranteed to stay high and rising; networking stocks should follow suit.
That's the theory. But as you know, theory and practice aren't always the same thing. Networking companies and their stocks do not move on a straight line to the stars, as you might expect.
Reality hit optical networker Infinera (Nasdaq: INFN) hard Wednesday. The company reported a pretty acceptable third quarter with a $0.09 adjusted loss per share on sales of $104 million. That was better than expected on both counts, but shares still plunged through the floor, closing the day 10.8% down. You guessed it: The outlook for the fourth quarter came in a bit light next to analyst projections. Look out below!
In related industry news, Alcatel-Lucent (NYSE: ALU) also crashed hard on a very drastic analyst note. Jeffries cut that stock from buy straight down to sell due to a lack of catalysts and timid network spending from North American backbones in general, AT&T (NYSE: T) in particular. Since 65% of Infinera's business comes from North America, comments like that strike directly at the company even if aimed at a competitor. What's bad for the goose is terrible for the gander.
That being said, Infinera does have catalysts lined up for 2012. A new line of high-speed optical cards promises to boost sales significantly, albeit at the cost of lower margins as manufacturing yields usually start out pretty low.
Infinera's largest customer is Level 3 Communications (Nasdaq: LVLT), and recent Level 3 addition Global Crossing is also on the list of significant clients. Hence, I would advise Infinera investors to listen up when the two-headed Level 3 beast reports its own results in a couple of weeks -- how Level 3 plans to invest in its networks makes a huge difference to Infinera.
This stock is an official recommendation of one Foolish newsletter and a real-money holding for three other services, not to mention a perfect five-star CAPS stock. Never mind one silly Fool waxing poetic about Infinera's catalysts -- a veritable army of sharp minds stands ready to back me up on this.
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