Finisar Taking Its Lumps

Summary

• Finisar shares have been weak on growing concerns about telecom capex plans and margins, and management's guidance for the next quarter will feed those fears.
• 40G data center upgrades and 100G telecom upgrades are still valid drivers, but companies like Avago are ramping up their own competitive efforts and silicon photonics remains a long-term threat.
• Finisar shares don't look all that cheap on a long-term DCF basis, but stabilization in the optical market could support a price in the low $20s if investors are willing

Optical components manufacturer Finisar (FNSR) has become a miserably bad call for me. Six months ago, I wrote that I would never want to hold Finisar for the long term and that I thought the shares were already trading at their inherent DCF-based value (with some bullish assumptions). I also thought, though, that momentum in the datacom business would support the business in the near term and lend strength to the shares. With the stock down more than 20% over the past six months, though, that clearly has not happened.

Along with fellow component manufacturer JDS Uniphase (JDSU) and telecom equipment companies like Alcatel Lucent (ALU) and Ciena (CIEN), Finisar is contending with weaker than expected telecom carrier spending. Finisar is also seeing lumpier datacom spending from Web 2.0 customers and weakening growth in wireless transceivers while pursuing lower-margin sales into the Chinese telecom market.

I didn't see a lot of intrinsic value in the shares six months ago, and I don't see much now either given the company's lower guidance. I can also construct a bearish scenario that would see the company retest the $11-$13 range. Finisar is part of a volatile sector and is heavily shorted, though, and the shares could bounce if business conditions improve and the company delivers beat-and-raise quarters. I do think that Finisar has good technology in 40G/100G transceivers and transponders, as well as opportunities with its wavelength selective switches and ROADM cards, but this is a pretty tough sector for value-oriented buy-and-hold investors like me.

A Familiar-Looking Quarter

Finisar's fiscal first quarter results (with guidance) remind me more than a little of what we saw the other day from Ciena. The reported results were basically okay, but the guidance was weak based in part on lower than expected carrier spending and lower gross margins.

Analyst’s Disclosure:The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.