Tech companies boasting overheated valuations have been a point of discussion throughout the year. While some are valued at multiples far higher than the revenues being generated, the argument goes that the promise of future growth justifies the valuation.
But when is a high valuation no longer merited? Looking at Infinera’s (INFN) current value proposition, B Riley analyst Dave Kang argues the bull case no longer holds.
Citing “valuation and various concerns,” the analyst downgraded the optical solutions provider’s rating from Buy to Neutral. At the same time, Kang gave the price target a little bump upwards from $10.5 to $11.5. (To watch Kang’s track record, click here)
Let’s take a look at both of Kang’s reasons for the change of heart. On the valuation front, “Improved fundamentals” have sent shares higher (up 38% year-to-date) and now INFN is only at a 21% discount to Ciena’s.
Furthermore, despite believing there are ways the company could “unlock the value of its DSP (digital signal processor)” technology, achieving such a goal “could be a case of being easier said than done.”
“The company has potential catalysts in 800G and XR, but 800G may not ramp significantly until 2H21 while XR’s future is still cloudy at this point,” the 5-star analyst said. “Meanwhile, our concerns are (1) 600G may not ramp as expected, and thus we may have to temper GM expansion expectations, (2) telco capex could be squeezed due to various factors, including the ongoing 5G spectrum auction, and (3) pluggables such as 400ZR/ZR+ could become a threat to its optical business.”
Signing off, Kang notes that should the valuation become more attractive and “more clarities” become evident on the aforementioned concerns, he will get more “constructive on the stock.”
How does Infinera fare amongst Kang’s colleagues? With 4 Holds and 2 additional Buys, the stock has a Moderate Buy consensus rating. However, most anticipate shares will stay range bound over the coming months as the $10.6 average price target indicates. (See INFN stock analysis on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.