The share price of Finisar (FNSR, Financial) dropped after the company declared a disappointing guidance for the third quarter of 2014. The expected slowdown in its performance for the third quarter was due to the unfavorable product mix such as higher sales of transceivers for its wireless applications and lower sales of 100G Ethernet transceivers. However, investors should see the growth prospects for the long term that looks pretty promising for the company.
Will Finisar improve?
Finisar has recently acquired LightSmyth Technologies. LightSmyth is one of the leading providers of semiconductor manufacturing tools that produce greater performance and cost-effective grating products. Finisar expects this acquisition to boost its vertical position and exploit its expertise in its own products. Earlier, LightSmyth supplied grating for Finisar's WSS ROADM product.
In addition, the company is strategically investing in new products such as 100G CFP2 coherent module. Finisar remains on track for the development of these products and effectively leveraging its receiver components, modulators and vertically integrated advanced Indium-Phosphide lasers. This is an excellent product in terms of power consumption and performance for both metro and the long haul coherent applications that should uplift its performance for bottom lines in the second half. Also, the company expects the demand for its transceiver to bounce back in the fourth-quarter as it is seeing strong LTE deployment in China that should resurrect its sales.
Certainly, this is a good opportunity for Finisar as the deployment for LTE infrastructure will create positive environment for component suppliers. According to Infonetics' report, the overall LTE spending will go past $20 billion in 2015 as the growing telecom market in the Asia Pacific regions. Finisar for sure will take a larger piece of this opportunity and maximize its returns.
Improving capacity
Additionally, Finisar is aggressively ramping up its production capacity and plans to launch various new products in the current quarter. Moreover, the company has begun shipping the samples of its 10G tunable SFP plus modules to most of its customers. Also, the company is producing the next generation vertically integrated optics that have the lowest power consumption module in the industry of about 1.5 watts.
The company is also working on producing its standard and cost-effective dual wavelength selective switches program. It remains on track to develop world class LCoS-based devices and WSS products that should certainly enrich customer experiences as it provides superior performance as against the other products from its peers. Meanwhile, it plans to utilize a single platform to tap multiple markets that should provide flexibility to its customers worldwide. Customers can purchase a single product that is capable of being deployed in many different configurations.
Furthermore, the company is seeing a growing demand for its products such as 100G CFP2 LR4 in its datacom segment. These products are gaining market tractions as its modules consume less power in the industry. Also, the company is focused on adding capacity that should reduce its lead times and assist Finisar to tap a greater opportunities in the market. In fact, the company has one of the broadest portfolios in the 40G datacom market for both its transceivers and optical cables in single or multi-mode configurations.
Apart from these, the company plans to announce various new and exciting product launches during the EOC trade show in Cannes, France, which is around the corner. Finisar is confronted with the short-term pains, but its long-term growth prospects look quite appealing. The analysts have estimated CAGR of 18.33%, which is greater-than-average industry CAGR of 16.11% for the next five years. This indicates tremendous growth for the stock in the long-run.
Conclusion
Finisar is currently trading at the trailing P/E multiple of 16.25 and forward P/E multiple of 10.84 that indicate fair valuations for the stock. Moreover, its PEG ratio for the next five year is estimated to be at 0.78 that continues to support its growth in the future. It has total cash of $497.38 million, quite sufficient to cover its entire debt of $254.51 million. So, investors can consider the stock to include it in their portfolio as it will certainly yield high returns over the years.
