William Blair Sees Limited Downside Potential for Finisar Corporation (FNSR) in Light of Setback in 3-D Production

Strong datacom market drivers could spur revenue growth in second half of fiscal 2018, says analyst.

A glitch in 3-D production has pushed Finisar Corporation (NASDAQ:FNSR) into a first fiscal first-quarter setback. The optical networking company will now have to delay its 3-D manufacturing ramp-up and as a result, provide its top competitor Lumentum an opportunity to take greater market share. While the company reported revenue of $342 million and posted EPS of $0.40, falling in-line with consensus, when measuring from the quarter’s midpoint, revenue missed consensus by $38 million and EPS fell short by $0.20.

Analyst Dmitry Netis of William Blair notes, “the unexpected twist in 3-D sensing will cause a delay in VCSEL volume ramp-up by roughly a quarter. The company noted that it changed the ‘manufacturing process’ for its high-powered VCSEL array […] As a result of this issue, Finisar is likely to lose share to Lumentum (LITE $57.40) at the lead customer (we surmise Apple [AAPL $161.26; Outperform]), but we remain confident this customer will require multisourcing of VCSEL arrays given industry supply constraints and to reduce manufacturing risk. Consequently, we expect Finisar to capture roughly 10% market share in 3-D sensing for initial shipments of high-powered VCSEL arrays, compared with our previous estimate of 20%.”

In reaction to these latest developments, the analyst is significantly lowering estimates for the fiscal second quarter through fiscal year 2019, highlighting: “We were bracing for weaker fiscal second-quarter guidance (October), looking for 3-D sensing to offset the ongoing China inventory correction.”

The analyst now estimates fiscal second quarter revenue at $332 million or $33 million lower than previously forecasted, while expecting EPS to take a turn south from $0.46 down to $0.29. For fiscal 2018, the numbers are only expected to get worse, as Netis lowers his revenue estimate by $97 million to $1.408 billion, while cutting EPS from $1.94 to $1.43. For fiscal 2019, the analyst again lowers his revenue projections from $1,602 million to $1,533 million, which notably represent a 9% rise year over year, while his expectations on EPS are again down from $2.15 to $1.73.

For the company’s credit, the analyst opines: “Given strong datacom market drivers (Finisar is currently the largest volume supplier of QSFP28 LR4 modules), potentially improving conditions in China (for client-side optics and WSS), new CFP2-ACO product cycle, and a large opportunity for ROADMs/WSS at Verizon, we believe revenue growth and margins could improve in second half of fiscal 2018.”

As such, the analyst maintains an Outperform rating on FNSR without providing a price target. (To watch Netis’s track record, click here)

Tipranks analytics reveal FNSR as a Strong Buy. Out of 12 analysts polled by TipRanks (in the past 3 months), 11 are bullish, while 1 is sidelined on Finisar stock. With a 46% upside potential the stock’s consensus price target stands at $31.48

Stay Ahead of Everyone Else

Get The Latest Stock News Alerts