Opnext: Due for Some Upgrades

Opnext (OPXT) is an optical component company that recently IPO’d. They mostly sell high speed transceivers – 10Gig and above. These transceivers go into telecom and datacom boxes. In 2006, the served available market was 357 and 189mm in telecom and datacom respectively. Third party sources (Ovum, Lightreading) expect this market space to grow 23% and 44% CAGR through 2008. OPXT is a supplier to a host of marqee customers like Cisco, ALU etc. The stock has a market cap of ~1B and trades at 16$ and change.

The street came out yesterday with reports on Opnext. Two buys and two holds. The street models look really low to me.

The historic quarterly revenue numbers for the company go as follows : Q1-06=31.3; Q2=35.5; Q3=38.6; Q4=46.1; Q1 07=40.4; Q2=55.3; Q3=61.7. You will notice that Q1 07 is sequentially lower than Q4-06. This is not coz of seasonality, it was a supply issue. I don’t expect it to happen again. The street expects OPXT to do ~65m in Q4-07… but given historic numbers, would you not think the number should be more like $68-69m or even better ~70m+? They just became public, and so I would expect better numbers for the quarter.

For 2008 and 2009, the street report with BUY had 298mm and 387mm; up 34% and 30% yoy. But if you look at quarterly estimates, the analyst has just grown revenues sequentially 3 to 7mm. That’s low, in my opinion. OPXT has grown revenues between 3 and 15mm in the last two years. Now going to margins – the company’s long term model has GM 35-40% and OM 10-15%. I would expect them to get there by 2009. The street has them doing 37% GM and 10% OM in Q4-09.

I’m not doing anyone’s homework here – but this stock does seem to be a candidate for a few upgrades in the coming year…

Disclosure: I am long OPXT and I also have it in my CNBC portfolio

OPXT 1-mo chart