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Why This Technology Stock Hasn't Run Out of Fuel Yet

May 28, 2014 | About:

The trimming of the revenue guidance by Cisco (CSCO), Finisar (NASDAQ:FNSR)'s key customer, led the fiber optics components supplier to suffer severely. Cisco accounted for 17% of Finisar’s revenue in fiscal 2013 that led to a weak outlook from the networking bellwether resulting in lowering of Finisar shares. However, the recently released results of Finisar proved that there is more to it than just Cisco.

A Sizzling Performance

The results of Finisar topped the charts. Revenue increased 25% over the prior-year period with Finisar experiencing strength in both of its end markets — telecom and datacom. Net income improved massively from $271,000 in the year-ago quarter to $30 million in the previous quarter.

For the current quarter, Finisar expects revenue to be in the range of $290 million to $305 million, above the consensus estimate of $290 million. Regarding earnings, the company is expecting $0.43 to $0.47 per share, beating the analysts' expectation of $0.38 per share. Hence, Finisar’s robust performance and terrific outlook makes Cisco’s troubles separated from it.

Diversification Helps

As Cisco accounts for close to a fifth of Finisar’s top-line last fiscal year, the networking giant’s cutting its three- to five-year revenue growth target from a range of 5% to 7% to a range of 3% to 6%, which must bring Finisar down.

A difficult economic environment and the recent government shutdown has led Cisco to face some tough times. Additionally, according to Reuters, Cisco’s fortunes in the emerging markets are now unstable after the recent surveillance allegations, since most of the data is transmitted through Cisco’s equipment. Further, Cisco is not supported politically either in China. But Finisar’s diversified customer base is enabling it to negotiate Cisco’s weakness quite well.

Key Customers

Finisar has a wide portfolio of customers, including the likes of Ciena, Alcatel-Lucent, Huawei, Nokia-Siemens, etc. Most of its customers are key players in the telecom and networking infrastructure industry, due to which Finisar is enjoying good growth in both its end markets.

For example, Ciena allows Finisar to access both domestic and international service providers. Ciena is the major supplier to AT&T and Verizon in the U.S., and it has also been expanding its network internationally. Ciena recently entered into a global partnership with Vodafone, while also winning several Tier 1 customer deals in emerging markets such as Brazil and India. In addition, Ciena also plans to upgrade the broadband network of Cablevision Argentina.

Ciena ended the last fiscal year with a backlog in excess of $1 billion due to key customer wins. Hence, if Finisar is suffering weak business from Cisco, it can look towards better business from other clients such as Ciena.

Also, Finisar looks like it is gaining share from peer JDS Uniphase. Uniphase suffered poor telecom demand in the previous quarter due to weak orders from North American customers, whereas, Finisar has captured growth in this business due to its impressive product development moves. The company started delivering several new products to its customer in the previous quarter while Uniphase seems to be struggling.

Datacom’s Outperformance Continues

Datacom is performing quite decently in its business for some time. In the previous quarter, datacom revenue increased 11%, sequentially, as Finisar recorded strong demand for 10G products and Ethernet switches. Going forward, Finisar is quite hopeful about the performance of this business and expects the growing complexity of data centers to support growth.

According to Infonetics, there are more than 500,000 data centers across the globe. Finisar aims to grab higher optical content in these data centers as they expand in size. Additionally, the global data center construction is expected to grow at a CAGR of 15.8% through 2016 as reported by TechNavio. Now, since Finisar has some most important networking and infrastructure companies as its clients, it seems quite comfortable to benefit from the growing data center market.

The Bottom Line

Finisar performed robustly in 2013, but there are still good opportunities of growth in the future as its prospects look strong. The forward P/E ratio of less than 13 and a PEG ratio of 0.58, indicates that the stock is relatively cheap with a robust growth rate. Hence, investors who still haven’t bought in to this growth story should definitely consider making it a part of their investment portfolio.

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