Oclaro, Inc.’s (OCLR) Chinese Demand Shortage Challenges: Red Flag or False Alarm?

Fiber-optics component maker Oclaro, Inc. (NASDAQ:OCLR) is encountering some challenges amid a collapsing demand in China, which leaves analysts and investors alike pondering: When will this demand shortage period will stop? On the heels of delivering its third quarterly earnings report just a few days ago, analysts from Raymond James, Needham, and MKM are sharing insights on what they see next for Oclaro.

Raymond James analyst Simon Leopold is mostly concerned about how quickly the company will be able to recover, initially projecting a rebound early June. However, now timing seems suspect, particularly considering Oclaro has pushed recovery expectations back to September-December.

The analyst elaborates, “Oclaro attributed the bulk of its weaker than anticipated guidance to a slowdown in Chinese demand, citing an inventory correction associated with a major OEM, which we think is Huawei. Although an inventory buildup remains a possibility, we think that the implementation of Vendor Managed Inventory (VMI) coupled with limited product availability reduces this risk. Instead, we believe that Huawei’s new cloud ambitions could be triggering the need to slim inventory in order to reduce sources of cash outflows. Oclaro sounded skeptical on a surmised June recovery, pushing positive expectations to the September or December quarters. […] Despite the headwinds, Oclaro continues to see the temporary spending pause as a timing issue, and the company anticipates that the fundamentals in this region have not changed. We previously reduced expectations based on the anticipated delays from the region, but expected demand to recover starting in early June; timing sounds at risk.

According to TipRanks, a financial engine that measures and ranks analysts’ and bloggers’ performance, Simon Leopold is ranked #878 out of #4561 analysts. Leopold has a 63% success rate and generates an annual yield of 5.8%.

Diverging from Leopold, Needham analyst Alex Henderson and MKM analyst Michael Genovese remain bullish on the company’s prospects.

Henderson reiterates a Buy rating with a price target of $14, which represents an upside close to 71% compared to where the shares last closed. The analyst firmly believes the downturn in the Chinese demand will cease soon. However, when asking Oclaro’s management team an estimate for the recovery period, the OCLR team answered it would depend mainly on the big China Mobile orders, without providing a specific time frame for a comeback just yet. Overall, the analyst assures that this “China wobble is temporary” and should not blur all the solid assets the company brings to the table. Bottom line, Henderson recommends to “buy on weakness.”

Echoing Henderson, Michael Genovese asserts Oclaro is “still best in class for margins, diversification and execution.” Despite the downturn in demand, which will potentially hurt the shares short-term, the company’s lead fiber optic devices, CFP2-ACO and QSFP28 “are not dependent on Chinese demand.” Therefore, Genovese reiterates a Buy rating as well, with a price target of $11, marking an increase close to 34% compared to where the shares last closed.

According to TipRanks, bullish analysts Alex Henderson and Michael Genovese are ranked #392 and #529 out of #4561 analysts, respectively. Needham analyst generates an 81.9% yearly return on OCLR stock while MKM analyst makes an annual of 36.6% on stock.

TipRanks analytics show OCLR as a Strong Buy. Based on 5 analysts offering recommendations for this share, all 5 issue a Buy. The 12-month average price target stands at $12.75, making a nearly 56% upside from where the stock is currently trading.


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