I'm a believer in growth stocks. As an analyst for our Motley Fool Rule Breakers service, I think you should be a believer, too. But even I have to admit some growth stories are bogus, hence this regular series.

Next up: Infinera (Nasdaq: INFN). Is this supplier of optical networking equipment the real thing? Let's get right to the numbers.

Foolish facts



CAPS stars (out of 5) *****
Total ratings 1,456
Percent bulls 98.1%
Percent bears 1.9%
Bullish pitches 156 out of 159
Highest-rated peers Digi International, Spirent Communications, Network Engines

Data current as of Jan. 27.

Infinera shareholders have had a rough time of it recently. In October, the stock fell as much as 30% after management warned of weaker-than-expected fourth-quarter results. Due to lower revenue contributions from Level 3 Networks, Infinera told investors to expect between $115 million and $120 million in Q4 revenue and $0.02 to $0.05 in per-share earnings.

Last night we got the official numbers, and while they were a little better than guidance, they weren't up to the Street's reduced expectations. Infinera booked $117.1 million in revenue and $0.07 per share. Analysts were expecting $117.6 million and $0.04. The stock is down some 17% as I write this.

Fools aren't likely to be the ones selling. For the most part, they believe in the long-term growth story playing out here. As Foolish investor Notsonovice pointed out last month, the rise of cloud computing and Web video delivery, among other things, has put more pressure on those who maintain the backbone of the Internet to upgrade their equipment. Infinera is a key supplier.

The elements of growth





Normalized net income growth Not measurable Not measurable Not measurable
Revenue growth 47% (40.5%) 111.2%
Gross margin 45.4% 34.0% 45.0%
Receivables growth 9.3% 0.2% 76.9%
Shares outstanding 101.2 96.6 101.2

Source: Capital IQ, a division of Standard & Poor's.

Unfortunately the numbers don't yet support the story. Let's review:

  • When it comes to generating revenue, Infinera's never quite found its groove. Demand is either really hot, or really cold. Growth investors prefer a developing trend that's reflected either in rising margins or accelerating growth. Or best of all: both.
  • Gross margins have normalized over the past 12 months, but that's only because demand came back. Margins will fall again when buyers return to hibernating.
  • If there's good news in this table it's that management is treading carefully. In 2010, receivables were up just a fraction compared to high revenue growth, reflecting a conservative collections policy.

Competitor and peer checkup


Normalized Net Income Growth (3 Years)

Alcatel-Lucent Not measurable
Ciena (Nasdaq: CIEN) Not measurable
Cisco Systems (Nasdaq: CSCO) (1.5%)
Infinera Not measurable
Tellabs (Nasdaq: TLAB) 35.5%

Source: Capital IQ. Data current as of Jan. 27.

This table doesn't tell us much. And what it does tell us, that Tellabs is the class of the group when it comes to growing normalized net income, may not be that helpful. Shares of Tellabs took a beating this week when management forecast weak first-quarter sales.

Grade: Sustainable
Despite all this, I'm sticking with Infinera. Rising bandwidth consumption will eventually force a wholesale modernizing of the backbone of the Internet. When that day arrives, operating margins should rise and create a geometric increase in cash flow, and in the stock price.

Now it's your turn to weigh in. Do you like Infinera at these levels? Let us know what you think using the comments box below. You can also ask me to evaluate a favorite growth story by sending me an email, or replying to me on Twitter.

Interested in more info on the stocks mentioned in this story? Add Alcatel-Lucent, Ciena, Cisco Systems, Infinera, Nortel Networks or Tellabs to your watchlist.

Both our Motley Fool Hidden Gems and Motley Fool Rule Breakers services have recommended members purchase shares of Infinera. Motley Fool Alpha owns shares of Cisco Systems.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. 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 owns shares of Infinera and has created a bull call spread position in Cisco. The Fool is also on Twitter as @TheMotleyFool. Its disclosure policy thinks Monty Python is sustainably funny.