Fiber-optic components supplier Finisar (NASDAQ:FNSR) took a heavy beating after missing earnings estimates for the fourth quarter, and a sluggish outlook didn't help matters either. Shares plunged almost 22% in a single day, erasing the gains that it had recorded so far in 2014. Analysts raised questions about Finisar's weak gross margin performance in the quarter, fearing that the metric could continue slipping on account of an unfavorable product mix.
However, Finisar has customers such as Cisco and Ciena (NYSE:CIEN), both of which are posting robust growth. In addition, the company seems well-positioned to benefit from the growing data center construction market, along with growth in telecom sales. So, even though Finisar's performance in the short run might remain under pressure due to higher sales of lower-margin products, the long-term prospects are intact.
Not too bad
Finisar's performance in the previous quarter wasn't bad on an absolute basis. Its revenue increased 26% year over year to $306 million, ahead of the $304 million consensus. Earnings jumped to $0.36 per share from $0.20 per share in the year-ago quarter, but missed the $0.38 estimate. In fact, Finisar's revenue was up for the seventh quarter in a row, and investors seem to be missing the point that the company posted terrific growth.
Of course, the earnings outlook for the current quarter was also below consensus, with Finisar guiding for a range of $0.30-$0.34 per share against the consensus of $0.41. However, the company's revenue is expected to come in between $320 million and $335 million, better than the Wall Street's $313 million forecast.
Beyond the margin challenge
Quite clearly, Finisar is suffering from margin challenges presently, but at the same time, it is reporting solid growth. Management conceded that sales of low-margin products will continue in the current quarter, primarily because it is trying to capture the telecom opportunity in China. In addition, the acquisition of u2t Photonics is proving to be dilutive to margins due to its low-margin profile.
It is likely that Finisar is trying to gain market share over rival JDS Uniphase, which is why it might be compromising on its margins. The opportunity in the telecom and datacom industry is huge, and Finisar's products are gaining solid traction. The u2t acquisition is proving to be a pain point right now, but Finisar is using its technology to deliver vertically integrated products that are superior in terms of power consumption and performance.
Products are gaining good traction
Finisar has received a positive response from the market for its 100G and 200G coherent architectures. It is shipping samples of its modules to several customers, and expects to achieve multiple key qualifications this year. Once the company's new products start ramping up, Finisar might start seeing improvements in its margin profile due to an improved competitive position.
In the datacom business, Finisar's 100G products will continue ramping throughout the year. Finisar claims that its datacom module consumes the lowest power of any other module in the market. In addition, the company is increasing capacity to shorten lead times and increase market share in transceivers and optical cables. Moreover, Finisar's 25 gigabit per second per channel product is also expected to ramp up strongly in the second half of 2014.
The end-market looks positive
All in all, the company is witnessing robust demand for its products. This can be attributed to the fact that its customers such as Ciena are doing well. When Ciena reported its second-quarter results, it beat analysts' estimates comprehensively, while also issuing a strong outlook. Ciena management also pointed out that telecom carriers are spending more on optical solutions to generate new revenue opportunities.
As a result, Ciena's relationship with Tier 1 customers strengthened. In addition, the company is now focusing on the software-defined networking (SDN) market for growth, having signed up customers such as Ericsson and Brocade.
Another key Ciena customer, AT&T (NYSE:T), intends to deploy high-speed fiber Internet connectivity in 100 cities across 21 metro areas. The service, known as AT&T U-verse With GigaPower, will allow it to deliver broadband speeds of up to 1 gigabit per second. This will be around 100 times faster than current broadband speeds.
Ciena's 6500 packet-optical platform for is already used by AT&T for its metro services, and the launch of the new fiber network can lead to stronger growth. As such, even Finisar can expect its addressable market to increase.
The good thing about Finisar's recent crash is that the stock is now quite cheap. At less than 11 times next year's earnings, the stock looks like a bargain. Moreover, analysts continue to remain bullish about its long-term prospects despite the massacre earlier this month, expecting its earnings to grow at an annual rate of 25% for the next five years. Hence, Finisar looks like a value play after the drop.
Harsh Chauhan has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. 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.
More from The Motley Fool
Why Optical Networking Stocks Had a Difficult Year in 2017
One giant customer lifted Applied Optoelectronics in the first half, but even that shining star joined Oclaro and Finisar in gloomy market trends later on.
Apple's Millions Could Give Finisar a Massive Boost
Apple's investment will boost Finisar's VCSEL prospects.
Apple Plays Dirty With Finisar Investment That May Limit Competitors' Supply
Apple is playing a powerful chess match, said Gene Munster, managing partner at Loup Ventures Capital.