Finisar: Fiber Optic Firecracker
by Chris Connor
Senior Technology Analyst, WallStreetCity.com
wallstreetcity.com.
In the Right Markets
Almost every single individual investor has heard of the impact that fiber optic stocks
have had on Wall Street over the last year, but they may not have heard of a highflying
fiber optic company called Finisar {FNSR}. With such high-profile customers as
EMC2 {EMC}, Newbridge Networks, IBM {IBM}, Sun Microsystems {SUNW},
Emulex {EMLX}, Extreme Network {EXTR}, and Brocade {BRCD}, Finisar
definitely deserves some attention from investors. The company specializes in fiber
optic subsystems and test equipment for the storage area network (SANs) and local
area network (LAN) markets. FNSR's fiber optic subsystems consist primarily of
receivers (convert incoming optical signals into electric signals), transmitters (convert
electric signals into optic signals), and transceivers (a combination of a transmitter and
a receiver) based on the Fibre Channel and Gigabit Ethernet protocols. Fibre Channel
is currently the primary technology for SANs while Gigabit Ethernet is developing into
the top LAN standard. It should be noted that there are several storage industry
insiders that believe Gigabit Ethernet (or the versions of Ethernet that follow) will
ultimately replace Fibre Channel as the backbone of SANs, so Finisar should have its
bases covered if that does happen.
What Fiber Optic Slowdown?
As Finisar's Quick Facts demonstrate, the company's revenues have been exploding
on a sequential basis. During the past nine straight quarters, the company has grown its
sequential revenues at an average of 24.5 percent each quarter. Investors should note
that Finisar's sequential revenue growth has also accelerated over its past three
quarters. Furthermore, the company has been profitable during eight of its last ten
quarters. The company's profitability is of special note because a large number of
highflying publicly-traded fiber optic companies such as New Focus {NUFO},
Luminent {LMNE}, Avici Systems {AVCI}, and Corvis {CORV} have yet to even
come close to entering the black. Looking over the longer term, analysts project that
FNSR will grow its earnings 42.5 percent a year over the next 5 years.
In a Class By Itself
Unlike other fiber optic companies, Finisar serves enterprises instead of telecom
service providers. In other words, Finisar's products are used for corporate intranets,
whose equipment is usually kept in one building, while fiber optic products from the
likes of JDS Uniphase {JDSU} are used in networks that stretch across continents and
oceans. This difference has allowed Finisar to avoid the financial impact caused by the
reduced telecom spending that has adversely affected the likes of Nortel {NT}. In
contrast, FNSR is boosted by the continuing fortunes of its three biggest customers
(EMC, BRCD, and EMLX) which make up about 50 percent of Finisar's sales and
are benefiting from the still-explosive storage industry. In fact, Finisar CEO Jerry
Rawls said in a recent interview with ON24 that Finisar will continue to grow well as
long as EMC2, Brocade, and Emulex continue to perform well.
Looking Forward
Besides the obvious enormous potential of the storage industry, Finisar also should
benefit from its broadband cable Digital Return Path Link product. This product allows
cable operators to offer two-way Internet access without the noise problems that are
usually present over fiber optic lines using analog signals (analog signals are vulnerable
to noises from various sources which hinder bandwidth). Moreover, Finisar has been
extremely adept at using its market leading Fibre Channel and Gigabit Ethernet test
equipment to garner business for its fiber optic sub-systems because Finisar is
intimately aware of the progress of its customer's product development so it can get the
jump on its competitors by developing products to satisfy its customer's needs as soon
as those needs arise. With that being said, investors should definitely research Finisar
further if they are looking for substantial stock price appreciation from a fiber optic
stock without the risk of reduced telecom spending. |
