Finisar Corporation (FNSR) Collaboration with Apple Inc. (AAPL) on VCSEL Arrays Is a ‘Strong Positive’: Analyst

William Blair's Dmitry Netis highlights key insights after meeting with FNSR CEO Kurt Adzema yesterday at the analyst's Silicon Valley investor bus tour.


Apple just made Finisar Corporation (NASDAQ:FNSR) shareholders very wealthy once the news made its rounds through the Street of a $390 million investment from the big tech titan. What caught Apple Inc. (NASDAQ:AAPL) eye that CEO Tim Cook’s machine (and its Advanced Manufacturing Fund) is leaping to authorize millions in this laser sensor supplier? Specifically, the buzz circulates the company’s vertical-cavity surface-emitting laser (VCSEL) operations, which Apple relies on in products like its iPhone for depth as well as proximity sensing.

In reaction, FNSR shares got a nice almost 29% boost, and in return, Apple will juice up its R&D spending and high-volume production of VCSEL arrays that are the powerhouse for the tech titan’s 3D sensing applications from Face ID to Animoji to Portrait Mode selfies users can take on the iPhone X TrueDepth camera.

William Blair analyst Dmitry Netis takes this alliance as a “strong positive,” and as such, he maintains an Outperform rating on FNSR stock without listing a price target. (To watch Netis’ track record, click here)

After trying to learn some details from “tight-lipped” CFO Kurt Adzema at the analyst’s Silicon Valley investor bus tour yesterday, Netis concludes with the following takeaways: “This joint investment affords Finisar to become a vertically integrated manufacturer (unlike Lumentum that uses third-party manufacturing facility and epitaxial wafer partners), which would expand its peak capacity (with combining Allen and Sherman, Texas fabs) to about $100 million a quarter, according to management, from roughly $30 million today. In rough strokes (using an average price of $2.00 per VCSEL array, which likely does not assume much more favorable pricing terms to Apple due to this investment), this represents a peak capacity of about 50 million units per quarter.”

Netis concludes, “The financial implications to Finisar remain vague at this point, but we believe manufacturing costs —to hire engineers and manufacturing equipment—and high-capital intensity of owning this fab will likely be absorbed by these funds, leading to higher contribution margin overtime. At the same time, the plan to ramp up the Sherman facility by the second half of 2018 is a very aggressive goal, in our view, and will require near-perfect execution.”

TipRanks highlights a largely positive analyst consensus backing Finisar stock, with 8 out of 11 analysts polled in the last 3 months bullish on the tech stock and just 3 hedging their bets on the sidelines. The 12-month average price target of $24.15 essentially aligns with current trading levels.