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Finisar (NASDAQ:FNSR), the world's largest supplier of optical components for the telecom industry, has seen its stock more than triple this year following surging demand for its programmable switching equipment. Finisar has the best performing stock this year of any Silicon Valley company with a market capitalization over $1 billion.

Finisar is the top holding of my Silicon Valley 2.0 portfolio, which has outperformed the S&P by 26 per cent annually.

Strong sales of wavelength selective switches (WSS) and reconfigurable optical add/drop multiplexers (ROADMs) have fueled Finisar's recent growth.

Tier one telcos worldwide, especially in North America, have made the deployment of ROADMs central to plans to upgrade their optical networks. ROADMs contain costs by allowing the use of mesh networks with links between many cities. This allows one circuit to provide protection for two or more routes, which reduces the amount of fiber needed to provide a reliable network. Verizon (NYSE:VZ) has undertaken the largest ROADM deployment to date when it began rolling out FIOS. The FIOS project is a major push by Verizon to provide a fiber connection to residential homes across the country, the first major U.S. carrier to do so.

Auriga analyst Chandan Sarkar said:

The ROADM cycle is what's driving all the growth in JDSU's (NASDAQ:JDSU) and Finisar's optical component business.

The use of ROADMs by Verizon to reduce bandwidth management costs related to their FIOS deployment made them realize how cost effective they are. Now Verizon is using them everywhere. A similar learning curve followed at AT&T (NYSE:T).

JDSU Uniphase, one of Verizon's FIOS partners, is the top maker of ROADM gear. The newest ROADMs use wavelength selective switches. There has been a shift away from JDSU to Finisar as WSSs have becoming increasingly popular.

Finisar and JDSU are at the forefront of a resurgence in optical equipment sales created by the explosion in wireless communications and video downloads.

"There was explosive growth in shipments of WSS components in the first half of 2010, with the market 95 percent higher than the same period last year," according to Andrew Schmitt, an analyst with telecom market research firm Infonetics Research. According to Infonetics, ROADM sales are the fastest growing segment of the optical equipment market, and the WSS is the key component fueling that growth.

The WSS is the chief optical component that allows the use of automation to manage traffic in fiber networks through the use of embedded software.

Source: Finisar Stock Soars As Programmable Optical Switch Sales Surge