Oclaro Inc (NASDAQ:OCLR) shares fell almost 26% yesterday even after the optical components maker had a “solid” first fiscal quarter of 2018 by the looks of it, writes FBR analyst Dave Kang. In fact, this is impressive considering both “China and CFPx headwinds” that Oclaro managed to beat earnings expectations. Yet, what could have spooked investors and led this FBR bull to lose some confidence on the tech stock?
It appears the “cloud sector gets cloudy” with “incrementally challenging traffic” is threatening to trip up Oclaro in its second fiscal quarter, leading to a disappointing guide that will demand a cloud rebound take place to restore investor confidence.
In reaction, the analyst has not given up conviction on the tech player, reiterating a Buy rating but cuts the price target from $11.75 to $9.00, which represents a close to 52% increase from current levels. (To watch Kang’s track record, click here)
For the first fiscal quarter of 2018, OCRL posted $155.6 million in sales, beating the analyst’s estimate of $155.1 million as well as the Street’s $154.5 million, along with EPS of $0.20 that surpassed both Kang’s expectations of $0.17 as well as the Street’s $0.18. However, trouble arose when it came to the second fiscal quarter guide, with the OCLR team setting sales forecasts between $135 and $143 million, coming up short of both the analyst’s projection of $153.0 million as well as the Street’s $158.8 million.
Meanwhile, China continues to be a “weak” spot for the company, with sales dipping roughly $6 million in quarterly growth, comprising of 27% of sales compared to the fourth fiscal quarter of 2017, where China brought in 32% of sales for Oclaro. While the OCLR team anticipates a recovery in the back half of 2018, this comes across to Kang as “more cautious,” with the analyst predicting a turnaround in the first quarter of calendar 2018. For now, the analyst reigns in his EPS expectations for fiscal 2018 from $0.65 to $0.54, with a GM forecast of 38.2% after the company’s gross margin fell from 41.4% in the fourth fiscal quarter of 2017 to 40.6% this last quarter- even with “higher sales” in tow.
Ultimately, Kang highlights: “The cloud segment, which has been a safe haven for a number of optical component suppliers this year, seems to have slowed down in recent weeks, prompting the company to issue a weak outlook for F2Q. We believe that the cloud malaise will last approximately two quarters. Timing of the slowdown is unfortunate since we believe the China recovery is just around the corner, though management has a more cautious view. Meanwhile, even ACO (Analog Coherent Optics), which has been one of the main growth drivers this year, seems to have been impacted by the general slowdown in the industry. As such, for the first time in a long while, the company will be without a compelling catalyst over the next quarter or two. Even though we are maintaining our Buy rating based on valuation, OCLR shares could be range bound until either China improves (which we believe could occur in 2H FY18) or cloud recovers (most likely F4Q).”
Wall Street’s vote is resoundingly bullish for the tech stock, with unanimous conviction, as TipRanks analytics exhibit OCLR as a Strong Buy. Out of 9 analysts polled by TipRanks in the last 3 months, all 9 are bullish on Oclaro stock. With a return potential of nearly 109%, the stock’s consensus target price stands at $12.44.