Finisar to Gain From Product Expansion Strategy, Risks Stay

On Dec 27, we issued an updated research report on Finisar Corporation FNSR.

The company boasts a leading position in supplying optical communications, providing components and subsystems to networking equipment manufacturers, data center operators, telecom service providers, consumer electronics and automotive companies. In its core business, Finisar expects to witness strong demand for ROADMs on a global basis with India and China beginning to deploy them in large volumes. For the upcoming 5G transition for wireless, it is a leading supplier of the major OEMs of 25 gig and 100 gig data rates for both short and long-reach applications. The company is well positioned for the 100 gig to 400 gig transition in the enterprise and data center markets, starting 2019.

With the growing relevance of the fiber optics market, Finisar believes that wavelength management and switching technologies will be increasingly important in optical transmission networks. The company focuses on targeting opportunities where it can use its high-speed data transmission protocols as these technologies are used across multiple data communication and telecommunication applications. Its products are also useful in markets and industries such as high-performance computing, military, medical and consumer electronics. Finisar is expanding its broad product line of optical subsystems through dedicated R&D activities to meet evolving customer needs. This holistic growth model augurs well for the long-term growth of the company.

The company believes in low cost and high value-added product manufacturing as a way to enhance revenues. It has low-cost manufacturing units in Ipoh, Malaysia and Wuxi, China, which significantly lowers the cost of production driven by cheap as well as efficient availability of labor. This offers a competitive advantage to Finisar over its rivals and helps it gain solid foothold in the markets in which it operates.

Risks

Finisar faces tough competition from financially and technically stronger companies. With increasing market consolidation, the company is likely to face soft margins owing to higher promotional offers and discounts to woo customers. Products that are exported overseas account for majority of Finisar’s overall revenues. The current restrictions on export to China pose threat to Finisar’s business.

Finisar has limited providers of materials for manufacturing its products. Several of them are independent contract manufacturers that supply key components. These contracts are generally short term, which means that the supplier can discontinue its service without any penalty. Moreover, the global market conditions have affected the business and finances of several of these suppliers, making it more likely for them to either go out of business or compromise on the quality of the supply materials. These factors are likely to pose a significant threat to the company’s operations.

With increasing tariffs, the overseas transfer of production may be costlier than expected, resulting in increased transfer costs and time delays. Moreover, the company might experience lower manufacturing yields in foreign locations than those achieved in the U.S. production locations. These factors may hurt its operating performance considerably.

The stock has gained just 4.1% compared with 24.9% growth recorded by the industry in the past year.

Nevertheless, we remain impressed with the inherent growth potential of this Zacks Rank #3 (Hold) stock.

Stocks to Consider

A few stocks in the broader industry worth considering are Arista Networks, Inc. ANET, Vocera Communications, Inc. VCRA and ARRIS International plc ARRS. While Arista and Vocera sport a Zacks Rank #1 (Strong Buy), ARRIS carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.          

Arista has a long-term earnings growth expectation of 21.7%.

Vocera has a long-term earnings growth expectation of 18.7%.

ARRIS has a long-term earnings growth expectation of 6.5%.

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