Last week, optical networking component supplier Finisar Corporation (NASDAQ:FNSR) set the Street on fire after its fourth-quarter results overwhelmed everyone. But, for anyone who was paying close attention to the sector, Finisar Corporation (NASDAQ:FNSR)’s terrific results wouldn’t have come as a surprise as the fiber-optic sector is on a roll and Finisar is doing its best to ride the optimism in telecom and data centers.
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.