Infinera Shatters Optical Space

by: Leigh Drogen

On Monday evening Infinera Corporation (NASDAQ:INFN) crushed the optical space after crushing their earnings estimates but giving guidance that was extremely weak. Before we get into the whole optical story, let’s just review that earnings report in a little more detail.

Infinera reported Q3 EPS of 0.18, double the 0.09 analyst consensus estimates. Revenues rose 56% YOY and 17% last quarter to 130 million versus the 126 million estimate. Margins came in at 51% versus 38% a year ago and 44% last quarter. In sum, it was a blowout quarter.

And then the conference call started. Infinera guided Q4 EPS at 0.02-0.05 versus the 0.11 estimate, they expect to see revenues at 115-120 million versus the 132.5 million estimate. They announced that they have less visibility going into Q4 than they had in previous quarters and that they had lower than expected bookings in September. Not good.

Then the stock got downgraded by Soleil from buy to hold. Then it got downgraded by Stifel Nicolaus from buy to hold. Then it fell 30% after hours.

So why am I writing a blog post on this? I was long Oplink (NASDAQ:OPLK) into the Infinera report, and it got smacked. I’ve been bullish on the optical space for a few weeks now as many of the charts were setting up well, and a bunch of names started to hit my earnings momentum scans. The other two names here are Oclaro (NASDAQ:OCLR) and Finisar (NASDAQ:FNSR), Finisar being the best performer recently of the bunch. Below you will find a chart that tells the revenue growth story of a few of these companies.

OCLR, FNSR, INFN Chart by YCharts

The growth story here is based on all of the fiber optic that was laid around the world during the tech boom, and the need to service those pipes, and build out higher speed pipes for the “last mile” into the consumer home. In the past it was necessary to have mind numbing speeds for data as they traveled long distances, from China to America let’s say. But with the desire for joe schmoe to watch Hulu on his computer at home, the last mile needs to catch up as well, and that’s where the fiber optic build out comes in. As well, all that extra pipe that lay dormant on the ocean floor for so long because of overcapacity needs to be turned on and used. The optical space in my estimation is set for a huge run.

Below I highlight what is taking place in the charts and the earnings growth of a few of these names. I also cover what to do now that they have gotten smacked around. I exited my position in Oplink Tuesday afternoon for a loss of 3.8% as it broke through my stop.