Another week in the market, another day for hysterical counter-reactions to previous irrational exuberance. Yes, I’m talking about optical stocks.
As I wrote earlier, optical stocks such as Ciena (CIEN), Infinera (INFN), and Finisar have been on a tear lately, supported by healthy growth in optical spending this year. This has largely been attached to the rollout in next-generation 4G LTE mobile technology, which requires more bandwidth in the edge and the core of telecom networks to haul all of those bits being consumed by YouTube videos that your kids are downloading.
Up, well, apparently that’s over. This week, we got a reality check. Infinera’s earnings were un-inspiring and the stock lost 10%, and Finisar (FNSR) got clobbered for 11%.
But wait… didn’t these stocks double in the last 12 months? Pretty much, folks. Let’s not get greedy.
Raymond James analyst Simon Leopold has a reality check. He points out that not only did Infinera’s results cause some selling, but AT&T also had a less optimistic forecast for capital spending in its quarterly report yesterday. Here’s what Leopold wrote in a research report issued yesterday:
A number of optical related stocks came under pressure today following reports from Infinera and ADVA that offered weak December quarter guidance below prior consensus. Furthermore, AT&T’s capital expenditures (capex) results and guidance implies an unseasonable weak 4Q adding further pressure to the sector. From a system perspective in our coverage universe, we believe Ciena is most at risk given its exposure to AT&T and the overall telecom environment followed by Alcatel-Lucent. Optical component suppliers most at risk include JDSU, which is Ciena’s largest optical component supplier, and NeoPhotonics. We think Finisar gets a pass given its relative low exposure to telecom (~30% of sales) and to Ciena, and we would take the opportunity of stock volatility to add to positions.
Leopold noted that both Infinera and ADVA Optical provided 4Q guidance below consensus expectations. Infinera now expects December quarter sales of $130-140 million compared to prior consensus $139 million, down 5% sequentially. Infinera still expects to grow 23% in 2013, though. ADVA, based in Germany, reported a poor Q$ outlook with sales of €71-76 million considerably below consensus for €90.9 million, down 7% sequentially and 8% year-over-year.
Overall, Leopold believes the selling may be overdone.
I offer this: These stocks are were up between 100-200% in the last year. The big fund players got in last year, when there was a lot of upside in capital spending for 2013. As I pointed out in the article, many analysts got the forecast for an optical boost right.
That spending has now been baked in. The stocks have appreciated. And the manic hedge funds that love to run stocks up are cashing some chips in. Not surprising.