If any segment looks promising for 2017, it may be optical communications, and with good reason. Many of those stocks outperformed the S&P 500 last year, and with numerous catalysts coming in 2017 and beyond, there is a good chance they could outperform yet again. Wall Street research indicates the industry average returned 62.5%, outpacing the Nasdaq Composite and S&P 500 returns of 7.5% and 9.5%, respectively.
A new Stifel research report notes that the firm’s coverage universe significantly outperformed market indexes, with the exception of Infinera, which saw a decline of 53.1% in share price. The analysts remain positive on the sector and said this in the report:
Our investment thesis for the optical communications industry is based on three major themes:
(1) network upgrades in China.
(2) hyperscale investments in intra-and inter-datacenter networking.
(3) 100G metro upgrade cycles.
Four stocks were rated Buy, and they all look outstanding for aggressive growth accounts.
Finisar
This stock took off in the fall and has pulled back recently, offering a very good entry point for investors. Finisar Corp. (NASDAQ: FNSR) provides optical subsystems and components for data communication and telecommunication applications in the United States, Malaysia, China and internationally.
Finisar’s optical subsystems primarily consist of transmitters, receivers, transceivers, transponders and active optical cables that provide the fundamental optical-electrical or optoelectronic interface for interconnecting the electronic equipment used in communication networks, including the switches, routers and servers used in wireline networks, as well as the antennas and base stations used in wireless networks.
The company also offers wavelength selective switches, which are used to switch network traffic from one optical fiber to multiple other fibers without converting to an electronic signal. In addition, it provides optical components comprising packaged lasers, receivers and photodetectors for data communication and telecommunication applications, as well as passive optical components for telecommunication applications.
The analysts noted in the report:
Our research suggests demand for datacom products is likely to remain robust in 2017, with Finisar having unmatched breadth of products and vertically integrated capacity that uniquely allows the company to address demand requirements. We see 100G driving growth again, which we note made up 30%-35% of Finisar’s datacom revenue in its last reported quarter (October).
The Stifel price target for the stock is $42, and the Wall Street consensus target is 42.88. The shares closed yesterday at $29.34.
Fabrinet
This is another top company that is riding the wave of enterprise data center growth. Fabrinet Inc. (NYSE: FN) is a leading provider of advanced optical packaging and precision optical, electro-mechanical and electronic manufacturing services to original equipment manufacturers of complex products, such as optical communication components, modules and subsystems, industrial lasers and sensors.
Fabrinet offers a broad range of advanced optical and electro-mechanical capabilities across the entire manufacturing process, including process design and engineering, supply chain management, manufacturing, advanced packaging, integration, final assembly and test. Fabrinet focuses on production of high-complexity products in any mix and any volume.
Stifel cited this in its report:
We expect Fabrinet’s optical communications segment to drive growth in 2017, with both telecom and datacom likely to sustain elevated growth rates, benefiting from a ramp in silicon photonics, China tailwinds, and Verizon’s 100G metro rollout. Telecom in particular should benefit from metro deployments contributing more substantively to growth, and is likely to outpace datacom growth in 2017.
Stifel has a $50 price target, and the consensus target is $52.29. The shares closed Tuesday at $37.98, down almost 6% on the day.
Lumentum
This top company looks to benefit big-time from the Facebook Voyager project. Lumentum Holdings Inc. (NASDAQ: LITE) manufactures and sells optical and photonic products in the Americas, the Asia-Pacific, Europe, the Middle East and Africa. It operates in two segments.
The Optical Communications segment offers components, modules and subsystems that enable the transmission and transport of video, audio and text data over high-capacity fiber optic cables.
The Commercial Lasers segment offers diode, direct-diode, diode-pumped solid-state, fiber and gas lasers. This segment serves customers in markets and applications, such as manufacturing, biotechnology, graphics and imaging, and remote sensing, as well as in precision machining, including drilling in printed circuit boards, wafer singulation and solar cell scribing. Its lasers products are used in various original equipment manufacturer applications.
This company is expected to provide Facebook with an open line system with white boxes such as terminal amplifiers and reconfigurable optical add drop multiplexers. This is all part of Facebook’s extensive new Voyager platform.
In addition, the analysts cited this special opportunity:
Lumentum could potentially sell its VCSEL solution into handset devices for 3D sensing applications in 2017. Management has indicated there is interest and commitment from device manufacturers to add 3D sensing, but a number of factors could prevent 3D sensing from contributing any revenues in 2017–leading to us to consider this opportunity as an option for 2017 as we have zero contributions from 3D sensing incorporated in our model.
The Stifel price target is set at $45. The consensus price objective is $45.10. The stock closed trading on Tuesday at $37.30.
Oclaro
This company posted outstanding quarterly results. Oclaro Inc. (NASDAQ: OCLR) designs, manufactures and markets lasers and optical components, modules and subsystems for the optical communications, industrial and consumer laser markets worldwide.
The company’s products generate, detect, combine and separate light signals in optical communications networks. It offers client side transceivers, including pluggable transceivers; line side transceivers; tunable laser transmitters, such as discrete lasers and co-packaged laser modulators; lithium niobate modulators to manipulate the phase or the amplitude of an optical signal; transponder modules for transmitter and receiver functions; and discrete lasers and receivers for metro and long-haul applications.
The Stifel analysts are bullish on the stock and noted this when the company reported earnings:
Oclaro results and guidance were again above expectations as 100G growth continues to impress (+140% year-over-year +23% quarter-over-quarter, 72% of revenue – fifth consecutive quarter of 20%+ sequential growth). Specifically, revenue of $135.5 million was ahead of our estimate and the consensus of $132.0/$131.6 million with pro forma earnings of $0.14 exceeding our and the consensus expectation of $0.09/$0.10.
The company also gave guidance for the fourth quarter that was way above analysts’ estimates.
The $11 Stifel price target is less than the consensus price objective of $12.19. The shares closed most recently at $8.42.
The need for speed is going nowhere but up, and these top companies will continue to be at the forefront. It’s important to remember that all these stocks are very aggressive plays and not for investors with low risk tolerance.
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