Optical networking technology, once the land of bubbles and crashes, is looking more and more like a steady growth market these days (knock on wood now).
You can see it most obviously in the stock prices of some leading optical pure plays: Ciena (CIEN) are up 130% year-to-date (YTD), trading at around $26 today they are near a new 52-week high today. Infinera (INFN), is up nearly 200%, although from a very low price, and Finisar (FNSR) has also approximately doubled.
Even some new optical stars have come onto the scene. Investors Business Daily (IBD) darling IPG Photonics (IPGP), which makes optical components, has been on an absolute tear, growing about 30% in the last year, and its share price has doubled in that time. It recently traded around $61 per share.
What’s up? Many analysts called this move right, predicting late last year that a new optical spending cycle would develop in 2014. The technology is being deployed to support the expansion of 4G LTE mobile networks, primarily using packet optical transport systems (POTS) technology.
For example, Infonetics analyst Andrew Schmitt, one of the best optical analysts I know, predicted strong segment growth in early 2013. “After ending 2012 on a flat note, things are looking up for the optical market in 2013,” said Andrew Schmitt in a report from early 2013.
Schmitt issued a report more recently in August, pointing out that the revenue acceleration in WDM optical technology occurred as expected, but that more growth could come online later in the year as Chinese operators step up optical deployment.
“WDM spending accelerated dramatically in North America as a result of 100G deployments hitting the ground, and worldwide spending on 100G speeds is tracking close to 15% of all optical spending,” Schmitt adds. “China’s 100G deployments will begin in earnest as the year closes, led by China Mobile, and we’re anticipating more than 5,000 ports of 100G in China alone in 2013.”
Other industry analysts seem equally optimistic. Research firm ACG research issued a report on Monday predicting CAGR of 4.4% through 2018.
“From a regional perspective the immediate growth is coming from network expansions of the incumbent carriers in North America and APAC and driven largely by the up-take in wireless 4G LTE based services,” writes ACG analyst Jeff Ogle in his research blog.
So do the optical stocks have further to run? IPG is still interesting as a growth play, as it has a forward P/E of only 17 and a P/E/Growth (PEG) ratio of under 1. Stocks like Ciena, Infinera, and Finisar are tougher to gauge because their prath cyclical growth spurts have been followed by stomach-churning drops. With sizable recent gains they would probably need accelerating growth to justify the new valuations.
One problem is that Ciena and Infinera have been losing a lot of money for a while. That’s expected to change. Analysts expect Infinera, a 2007 IPO, to break even in 2014. Ciena, with a $2.7B market cap, is expected to earn about $1 per share, which gives it a forward P/E ratio of 26, not cheap by any means, but if growth were to continue into 2015 the company should have the momentum to grow into its valuation.