Thus, the stock’s appreciation of close to 30% over the past one month is quite justified even though the broader market has declined. But, you might be thinking — why should I care as the stock has already run up quite some distance? Well, there are a few simple reasons why I believe that Finisar Corporation (NASDAQ:FNSR) has room to appreciate further.
Datacom on a roll
Finisar’s data communications business has been performing well for quite some time now and the strength was seen in the previous quarter as well. The company believes that the growth in data centers, both in terms of size and number, will aid this division and help growth. To make the most of this opportunity, Finisar has been aggressively focusing on its research and development initiatives.
The company recently began the initial shipment of a new 100G module on a test basis. Management states that this product consumes lesser power than its competitors’ products and would help its customers provide greater bandwidth. The CFP2 module, as it is known, will see a ramp up in production later this year.
Finisar Corporation (NASDAQ:FNSR) is focused on making its other solutions better by reducing size and power consumption and bringing them to market next year. Moreover, its 10-gigabit SFP wire program is also on the verge of moving into the production phase. This product should also help Finisar’s business grow as the company states that this optical cable solution is more efficient than the copper solutions, and Finisar says that it is witnessing strong demand for it and hence, it is ramping up production.
It’s clear that Finisar Corporation (NASDAQ:FNSR) is making the right moves as far as product development is concerned, but more importantly, it has the right customer to profit from the growth of data centers — Cisco Systems, Inc. (NASDAQ:CSCO).
Now, having a networking bellwether like Cisco Systems, Inc. (NASDAQ:CSCO) as a customer is certainly a positive as the company has been aggressively strengthening its position in the cloud. However, there’s been a concern of late regarding Finisar’s business from Cisco as the networking giant has been working on its silicon photonics technology.
Earlier this year, Cisco Systems, Inc. (NASDAQ:CSCO) said that silicon photonics will enhance connectivity speed between routers and switch line cards while consuming less power, and has even funded a start-up for the purpose of developing this technology. Such technology is expected to hurt optical component makers such as Finisar badly, but, as Needham analyst Alexander Henderson had told Bloomberg earlier this year, the technology would have an impact on 6% of Finisar Corporation (NASDAQ:FNSR)’s business.
Thus, I would rather count Cisco as an advantage rather than a major threat, but it would be wise to keep an eye on developments in this field going forward.
Telecom to improve
While the datacom business looks in good shape with a revenue spike of 11% in the previous quarter, the telecom business failed to inspire. Revenue from telecom, which makes up a third of overall revenue, declined 12% from last year. However, there are enough indications that lead me to believe that the telecom business should get better as well.
As I’d pointed out in my preview of Finisar’s earnings, terrific results from optical networker Ciena Corporation (NASDAQ:CIEN) earlier this month indicated that telecom spending is still up and running and should get better going forward. Like Finisar, even Ciena Corporation (NASDAQ:CIEN)’s guidance was stellar as the company is well-positioned to benefit from network infrastructure upgrades by telecom carriers.
Since Ciena counts the likes of AT&T Inc. (NYSE:T), Verizon Communications Inc. (NYSE:VZ), and other telco customers, it means that these companies are investing capital to roll out faster networks and this is good news for Finisar. Moreover, Ciena Corporation (NASDAQ:CIEN) had stated that it is looking to gain from the multi-year upgrade cycle in telecom and this indicates a brighter future for companies involved in fiber-optics such as Finisar.
Finisar Corporation (NASDAQ:FNSR) has made some product development moves in the telecom side of its business to benefit from the roll out of faster networks and its cost-effective 100G solution has found traction in the market. Finisar is also expecting higher telecom spending in the second half of the year and is looking at overall revenue in excess of $1 billion for the current fiscal year, a jump of 10%-15% over the recently-concluded fiscal 2013.
The expected revenue growth is impressive given the fact that Finisar’s revenue had declined in the previous fiscal year to the tune of almost 2%, and a growth in telecom revenue will be a major driver of this growth.
The bottom line
It’s evident that there’s opportunity for Finisar to grow and the company is looking to tap this opportunity by innovating and making its products better. The optimism reflects in the company’s own outlook and analyst estimates, which put the company’s earnings growth rate at a commendable 61% for this year and 22% for next year.
Moreover, with a forward earnings multiple of 13 times and a balance sheet without any debt and ample cash, I think Finisar Corporation (NASDAQ:FNSR) is a good deal right now.
The article 1 Stock That Should Help You Beat the Market originally appeared on Fool.com and is written by Harsh Chauhan.
Harsh Chauhan has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems (NASDAQ:CSCO). Harsh is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
