If you want to see what happens when a high-priced growth stock gives analysts tepid expectations for the upcoming quarter, look no further than optical communications network specialist Infinera (Nasdaq: INFN). At first glance, the company's third-quarter earnings report looked good. Infinera's third-quarter earnings per share of $0.18 doubled Wall Street's estimates, and the company's revenues of $130.1 million cleanly beat analyst projections of $126.4 million.
However, in a forward-looking market, Infinera gave investors little to look forward to. On the company's conference call, Infinera CFO Ita Brennan said: "We have included the impact of the three new customer wins in our revenue guidance. However, this growth is offset by the fact that many of our existing customers have already completed significant network build-outs earlier this year, and are not likely to drive incremental revenue in the December quarter."
As a result, Infinera management believes that fourth-quarter earnings and revenue will come in below the third-quarter results, and significantly below analysts' current expectations. Shares that closed Monday trading at $12.33 traded as low as $7.79 during that day, and closed on Tuesday at $7.95 -- a loss of more than 35%.
Momentum reversal
Infinera has been one of the best-performing stocks in the market since June, and had significant momentum going into the earnings report. In fact, shares traded as low as $5.70 on June 9, meaning the stock had more than doubled in a little more than four months.
While my colleague Anders Bylund believes that this new drop presents a great opportunity to buy shares in a beaten-down name. I think investors may be better served to look at the broader optical-networking industry. Across optical networking, companies like Finisar (Nasdaq: FNSR), Cienna (Nasdaq: CIEN), Oclaro (Nasdaq: OCLR), and JDSU (Nasdaq: JDSU) all opened sharply lower on Tuesday, thanks to Infinera's poor guidance.
Bandwidth demand still growing exponentially
The huge demand for bandwidth forces large Internet service and telecom providers to spend massively on fiber-optic improvements, ensuring that customers can navigate their networks at high speed. Think about the amount of bandwidth Google needs to maintain YouTube, or that eBay needs to keep its data flowing smoothly, and you get the picture. Throw in the expansion of video across the web, and Internet traffic is increasing at a rate of 50% year over year. It is expected that the optics component market will grow by 30% this year, and between 15%-20% next year.
Finisar looks good
If you believe in the continued fast-paced growth in the smartphone market and the growth of Internet video, then the optics component makers are a great play. In particular, I would point to the second-largest fiber-optic component maker in the U.S., Finisar.
Verizon (NYSE: VZ), AT&T (NYSE: T), and other telecom networks weren't originally built to support today's do-it-all smartphones of today. Networks created to handle telephone calls now have to support live sporting events, YouTube videos, and Twitter feeds. Fiber-optic component makers will benefit from the need to build out these networks to support rapidly expanding bandwidth demand. Finisar is in a strong position to benefit from this growth.
While the Infinera earnings release has scared some investors away, I would note that Finisar trades at a forward P/E of just 13, which is lower than the forward P/E of 17 that key rival JDS Uniphase sports. In addition, just last week Brocade honored Finisar with its Customer Focus award. Brocade's press release stated, "The award honored Finisar for a deep commitment to Brocade in providing quality products and customer support at a level unmatched in the industry."
While this industry has long languished under crushing losses, the stars have finally aligned, and optical networking's time has come at last. I think the industry as a whole stands to gain, but Finisar looks especially tasty at today's prices. A strong company in a growing industry, with a great reputation among its customers sounds like a winner to me. This Infinera-led pullback in the stock should provide investors a great opportunity to gain exposure in this extremely high-growth market.
Interested in reading more about Finisar? Add it to My Watchlist, which will find all of our Foolish analysis on this stock.
