The selloff in the optical network stocks has been even more dizzying than its rise last year, especially in some names like market leader Finisar (NASDAQ:FNSR), which has had a 41% haircut in a month.
For stock moves this big, one is inclined to think that there must be big reasons behind it, so we start with a tour of all the ‘negatives’ we can think off, and reason from there.
The negatives for the sector in general, and the market leader Finisar in particular, we can think off:
- It’s a fragmented sector where few companies are able to develop some meaningful moat. But this is an issue that is hardly new.
- The sector is fairly cyclical, going through bursts of demand cycles. This is also a well-known issue.
- We have just been through an up-cycle and companies have seen their production and profits lifted, but their share prices have followed and valuation had become stretched.
- Some companies also ran up on the expectation of selling laser diodes to the mobile industry for 3D sensing, most notably to the new iPhones from Apple. But there are rumors that these phones are delayed.
- There were some execution mishaps at Finisar which produced a soft Q3 result and soft Q4 guidance.
- There are rumors that the demand from China is tapering off.
- A report from MKM Partners seeing softness in legacy business (10G) and other segments.
Let’s start with the latter as this is what is likely to have caused Wednesday’s selloff. Here is a quote from the MKM report:
The analyst voiced concern on a number of fronts, “including China, for all products and 10G Datacom and Fibre Channel/SAN in the U.S. and Europe.” Genovese sees fourth quarter demand in China weak due in part to lower demand from Huawei with weakness in product demand across the board, including WSS, 10G Datacom and Telecom, and CFP2. According to the note, FiberHome and ZTE (OTCPK:ZTCOF) are also sluggish for Finisar.
Well, there are several answers to that. Nobody else has noticed this, beyond the soft guidance Finisar itself gave for its upcoming Q4 quarter. Indeed, in the linked article Raymond James’ analyst Simon Leopold is puzzled by it. He argues that:
he has heard talk that Huawei is cutting spending, but he thinks this was built into the company’s guidance; he “suspects somebody is suggesting” Finisar’s legacy business is very weak, but said this has been the case for a while; and “some are claiming” the QSFP28 has issues, but his checks find it is fine and Cisco (NASDAQ:CSCO) is “buying as many as it can.”
Perhaps, we should also keep in mind that MKM Partners has lowered its Q4 revenue guidance from $372M to $341M and EPS guidance from $0.53 to $0.46, but still keeps a buy and a share price target of $32 (down from $41).
So at the moment of writing, the most negative analyst on Finisar still has a price target which is a full $10+ above its current market price, a whopping 45%+ appreciation. And the negativity is based on stuff that is either already baked into guidance from the company…