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Is This Expensive Tech Stock Worth Buying?

By Harsh Chauhan – Mar 4, 2014 at 8:05AM

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Strength in telecom and data centers could take this company higher, but is it a buy at its current valuation?

Fiber-optics components company JDS Uniphase's (VIAV 0.10%) fortunes have turned around remarkably. Driven by lower telecom orders from its North American customers, uneven capital spending by telecom companies, and stiff competition from Finisar (FNSR), Uniphase was having a bad time last year.

However, it looks like all these factors have turned in the company's favor. Uniphase is seeing consistent demand for fiber-optic parts and testing equipment in China on the back of the LTE roll out by China Mobile (CHL), while its gesture recognition solutions have been used by Microsoft (MSFT 1.97%) for the Xbox.  Both these end-markets, along with others, should continue to gain steam as the year progresses.

Back on track
Driven by these tailwinds, Uniphase performed ahead of expectations in its recently reported second quarter, and issued a strong outlook. Uniphase management has always been confident about the prospects of the business as the need for bandwidth across the world increases. As a result, Uniphase is seeing strong demand in the Americas for its 100G products and LTE solutions.  

However, China seems to present the most important opportunity for Uniphase. Telecom activity has picked up in the country after a slow start to the LTE roll out in 2013. This year, the deployment of TD-LTE in China should benefit Uniphase's business more than last year.

China Mobile has set itself a target of building 500,000 base stations this year in an effort to cover 350 cities by the end of 2014. It is expected that half of China Mobile's capex budget this year will be dedicated toward LTE deployment. This presents a substantial opportunity for Uniphase as it should see stronger demand for its test and measurement solutions.

Moreover, Uniphase's growth should be helped by the fact that telecom carriers are looking to make their networks more efficient and capable. In order to address greater traffic, an increase in the number of applications, and security requirements, telcos would need to upgrade networks with the use of necessary software or adding small cells. In such situations, Uniphase's network service enablement solutions will come in handy for telecom carriers looking to test their upgrades.

Datacom growth
Uniphase is expecting its data communications business to perform well once again this year. The company sees data-center build-out and expansion of the cloud as catalysts for its datacom business, leading to strong demand for its 10G and 40G products. Uniphase is working on increasing its market share in this segment by introducing new products, and this is a necessity since rival Finisar has a stronghold in this market.

Finisar's datacom revenue was up 11% in the second quarter, driven by demand for 10G products and Ethernet switches. Finisar is intent on capturing higher optical content in data centers going forward, and since it has key clients such as Ciena, Alcatel-Lucent, Huawei, Nokia-Siemens, and Cisco, it might find it easier to tap this market.

However, Uniphase is investing in product development to churn out new products, and address current market trends and customer needs. In addition, it is focusing on novel technologies. Uniphase's gesture recognition solution is being used by Microsoft's Xbox One's Kinect system and console. This helps the Xbox provide highly precise 3D imaging capabilities to improve gamer experience, displaying the potential of its gesture recognition offerings.

Microsoft is a key win for Uniphase and the company could generate positive PR and revenue, for itself with this customer. The Xbox One was the best-selling console in December in the U.S., according to NPD, selling 908,000 units, while the Xbox 360 also sold a respectable 643,000 units. As the console cycle moves forward and sales of these devices increase, Uniphase's revenue from this business segment could increase further.

But Uniphase isn't dependent on just Microsoft for its gesture solutions. It is working with other customers as well for other applications, and expects revenue to start showing up from the second half of the year.

But is it a buy right now?
Uniphase is seeing a lot of traction in its end markets as we saw above. However, at more than 43 times trailing earnings, it isn't a good time to initiate a fresh position in the stock. For comparison, peer Finisar trades at a lower 40 times earnings, but its revenue growth is far superior to that of Uniphase. Moreover, Uniphase is expensive when compared to the industry average of 26 times trailing earnings.So, even though the company has good prospects going forward, investors should wait for a better point of entry on pullbacks.

Harsh Chauhan has no position in any stocks mentioned. The Motley Fool owns shares of China Mobile and Microsoft. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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