Antidote to Kevin

Investment Analysis Clubs Saul’s Investing Discussions
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Friends, Countrymen,

Monkey comes to bury Kevin’s optimism, not to praise it.

Because, Monkey, too, has been exceptionally susceptible to increasing his stake in INFN based on the optimistic detailed sleuthing we’ve been blessed to read, how’s this for an antidote:

Infinera started with blazing technology that was way better than the other guy’s. Back in the day, it was TMFHumbleServant who told us all about how terrific it was, and how great the razor blade model was for increasing margins down the road.

That was the story. The reality is that in 2010, the INFN stock reached a high of $12.83. Six years later, we’ve got an underwhelming 13.5% increase to $14.69. Six years is no chump-change, time-wise, no matter what kind of creature you are. Lots of lost bananas if you bought and held.

The reason, allow Monkey to pipe up about, is that in the technology world, there are so many complex and multiple variables, that best does not mean most revenue. Unfair? Stupid? Obstinate? Boorish? Yes. But that’s the reality of fancy-pants tech industries.

So: it appears that Infinera are the gold standard in the expanding bandwith market. But we don’t really care about that, do we? We care about the stock price because only the stock price can get you some golden bananas; we can’t eat us no bandwith.

So to temper the enthusiam for INFN, just remember that for six years, Infinera is losing to the market by a lot. Is it possible we’ll need another six years for the price to pop? Nothing’s impossible.

Sorry for the bucket of cold ice.

What sez you, Kevin? What’s so different about now? And recall that five years ago the enthusiasm about Infinera was just as palpable as it is now. But that enthusiasm ended up theoretical and didn’t translate.

Obviously this is polemical and bearish. And not that Monkey believes his own post either. But it’s a perspective y’all big-brains should keep in ya’ noggins, too, alongside all the wild enthusiasm. Maybe that’ll help some folks keep their INFN positions under 100%.

Humbly Yours,

Monkey
Long INFN since the dinosaur age and so with first-head experience about how frustrating “this time it’s different because X, Y, Z” can be.

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Hi Monkey - I just read your post after I put together a summary on Q1 progress. I had intended to write two more of them.

After reading your post I hope you don’t find what I wrote disingenuous.

I am not sure how to respond - but I certainly agree with facts. I think though that you’re taking a your data points from two very different windows in time, and when you change that time frame you may find what is different is actually a repeat of what is the same.

The reality is that in 2010, the INFN stock reached a high of $12.83. Six years later, we’ve got an underwhelming 13.5% increase to $14.69.

That is most certainly true. However, Five years later INFN reached a high of $25. That is a much different perspective on a return.

So what happened during that run up from 2010 up to last year? DTN-X started its ramp and proceeded to take a big chunk out of the long haul market. That’s really what happened, their technology worked. Honest it did. And their stock appreciated as a result.

What is different now? I say what is the same. They want to repeat that success in tangential markets. That’s what is going on today. And they are capitalizing on rapidly accelerating bandwidth demands in a technology climate that is moving faster than anyone had expected. It sucks that we’re back in the teens in the mean time, I agree, but it is my opinion that the price is not at all warranted given the beats they put up along the way last year.

I think I should stop here. At this point I would really like others who follow Infinera to add their commentary besides myself on this one. I am optimistic, but I agree with you that optimism should be tempered. No one should be at 100% allocation in Infinera.

I think it might also be appropriate if I refrain from posting for a bit if that is affecting people’s mindset. Especially if folks are overallocating. Would that be helpful?

Best,
–Kevin

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Well said for a haplorhine primate, Monkey. I too have been a long time owner (since 2008!) of INFN who is sitting on a nice profit. But I am aware that I’d done much better by just buying SPX. At some point they need to deliver the $$.

https://www.youtube.com/watch?v=FFrag8ll85w

Maybe 2016 will be the year?

DT

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Kevin,

a) Keep the news coing. This is an adult board. Monkey provided the antidote. We are able to make proper allocation decisions. If not, go to Supernova.

b) By memory (I am at my other computer and too lazy to walk to the other end of the house) I believe that INFN was not making money in '10. It was a story stock with no earnings. O.k., now it is a story stock that IS making money on the old story. Check the hype-cycle position on old and current story.

One bit of missing information is the revenue of these wins. How many does it take to move the needle? I shold research that but I’m kicking back with a brew as the sun sets behind the mountains across the bay and I ain’t moving while the mug is still frosty.

KC

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What’s so different about now?

An excellent question, my Simiform friend.

I am relatively new to INFN, having purchased a small stake in the hope they can turn one banana into many in the next few years.

When I look at INFN in 2010, I see a company that had -$28 million in operating income on $454 million in revenue. They were spending $21 million in R&D, and were generating 0.10 bananas in free cash flow per share.

The company looks a lot stronger now. In 2015 had $66 million in operating income on $887 million in revenue. They were spending $42 million in R&D, and were generating 0.64 bananas in free cash flow per share.

What’s so different about now?

I think there are three possibilities:

a. It had a frothy valuation then, and has a frothy valuation now, although less so.
b. It had a frothy valuation then, and is fairly-valued now.
c. It had a frothy valuation then, and now seems under-valued.

The Hominids among you tend to be a forward-looking bunch, and don’t much care about what happened in the past. The hairless one we call Kevin may be able to see a little further than the rest of us. However, we can’t be sure that he sees the whole picture. He sees big piles of bananas just ripe for the taking. Maybe there is a leopard behind that pile of bananas that he cannot see. I don’t think there is. I’m going to grab some bananas.

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The problem with stocks like INFN – notice I’m not talking about the company Infinera Corp. or about the technology they market – can be discerned from this picture.

http://softwaretimes.com/pics/infn-04-21-2016.gif

Are you in the 30 to 6 crowd or the 6 to 24 crowd, or the languish at 8 crowd? It has little to do with the technology and lots to do with expectations. What are expectations made of? When there is little track record as with an IPO your only basis is hope and hype or whatever its opposite is. With a 20 year track record there is reality to keep you in check.

I’m no stranger to technology having started my professional life as a programmer with IBM in 1960. I’m not a technology basher by any means. I’ve been fantastically wrong about technology stocks based on my opinion about which technology is the better one. No offense, but Intel beat the pants off several processors that were head and shoulders above it technologically. Success has little to do with technology and lots to do with the market’s pick of one of the competitors. If this sounds like illogical, it is. But the mathematics of economics backs this reality.

There are two (not one) economic laws: Increasing Returns and Decreasing Returns. Classical economics are based on the latter. It applies to commodity type products. If you have a piece of land you start farming the best part. If your crop is successful and the market wants more of it, you have to start farming less desirable land until you get to the point where additional and is so bad it’s not worth farming. You have decreasing returns per acre. The mathematics of this situation of supply and demand is fairly simple and has a SINGLE equilibrium point which economists can calculate quite accurately (market-clearing price).

Increasing returns apply to technologies where the more you sell the more you sell. Examples are the IBM S/360-S/370, Intel’s x86, Windows, Oracle’s database. What happens here is that several technologies compete and the market picks the winner and it does not necessarily pick the best, whatever that might be. A lot of research has been done in this area by the Santa Fe Institute which was founded by folks from Los Alamos, quite a bright bunch. :wink: For us the important takeaway is that the mathematics of Increasing Returns says that there are several potential equilibrium points and that one is picked AT RANDOM. That means no one knows which it will be until after the fact.

In practical terms, I’m willing to invest in 25 year old ARM Holdings (ARMH) which has a 75% market share of mobile and embedded chips, a lead that that are not likely to surrender. For decades people though no one would beat Intel at its game. And no one has in big powerful chips but ARM is in a different market and there is little Intel can do about it.

But with a new technology it is simple impossible to pick a winner ahead of time. The Gorilla Game, which dealt with technology investing, advised to “buy the basket and sell the losers.” I now think it’s better to wait until the market picks the winner. Then go for it, it will have a nice multiyear or multidecade run.

Sorry Kevin, you get no bananas! Monkey took them all. :wink:

Denny Schlesinger

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I think it might also be appropriate if I refrain from posting for a bit if that is affecting people’s mindset. Especially if folks are overallocating. Would that be helpful?

Best,
–Kevin

Please keep posting. Maybe add “please do your own research” or words to the effect.

Denny Schlesinger

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Despite the comparison of a high several years ago to today’s price, there have been moments that TomE would refer to as value points to add to one’s position during this same timeframe. I started my position in INFN in Jan 2013 at $7.45 a share, after a TMF rec. The market has given us a few of these opportunities since Jan2013. It’s a solid company and is positioned with its products excellently. A little giant for now…

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Monkey would throw himself off highest jungle branch if his antidote post led to fewer Kevin posts. That was not the intention, not even a little bit.

The intention was to remind folks that good news in the technological world does not always translate to bananas.

KC above wrote:

One bit of missing information is the revenue of these wins. How many does it take to move the needle?

I think as enjoyable it is for tech weenies like us to read about how Infinera’s technology is the best, these kinds of posts would be even more valuable––in the most literal of senses––if they also addressed KC’s question.

For example: the bit about Infinera’s truck parked outside the conference in Italy on the verge of Europe’s expansion. “This is a big deal” makes sense technologically. But a Monkey like me has absolutely zero idea of how much increased revenue that translates to, potentially. Does anyone?

Kevin: you’re a saint to do as much work as you do for the benefit of your fellow INFN investors. We are blessed to have such a generous heart and mind on these boards. Please don’t stop sharing your information and insights with us.

But for the rest of us, let’s just be careful to reframe the technological story into revenue and revenue into earnings, and earnings into potential stock price appreciation. It just sucks so hard to follow a winning story and still have to eat a bowl of oats for breakfast because the bananas were in another jungle.

Humbly Yours,

Monkey
Long INFN and happy to share so of his future banana crop with Kevin should such a thing come to pass.

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What’s so different about now? And recall that five years ago the enthusiasm about Infinera was just as palpable as it is now. But that enthusiasm ended up theoretical and didn’t translate.

Hi Monkey -

I missed a few additional points last night. Part of that was being tired and needing to get to bed.

First, I too was in Infinera in 2008, so I do understand where you are coming from.

But on the enthusiasm being theoretical - I have to disagree. It did actually translate. Last year the stock hit $25. That to me is pretty good translating.

Really what we are examining is what has been going on since that point in time last year. Is what they have done in the past still working today?

I think that part is still working. Have a look the revenue growth. It is still accelerating. Have a look at the market share gains made. Last year they grew 25% faster than their nearest competitor. So on paper they are looking pretty good on their numbers.

So why has the stock price dragged? I do not have an answer. I can offer lots of theory of course. One is Infinera is getting into some new territory. Can they repeat their success? Well, maybe the market is not so sure and that is why the price is what it is. As Denny pointed out - maybe the market wants to see that first.

I think we’ll see some insights appear this quarter when they guide for Q2. But I also think we’ll see a lot more when we get to Q3. If you want a “show me first” then I’d wait until that time - and then they’ll tell us.

Part of the reason for the sleuthing is to get a head start into that insight. To learn where they are going before they tell you and everyone else in their earnings conference call. Waiting to be told officially is certainly a strategy. I don’t really want to do that. I want to be involved before the market catches on. So that’s why I’m doing what I’m doing.

Thanks for reading.

Best,
–Kevin

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Last year they grew 25% faster than their nearest competitor.

Sorry I got my number wrong there and the context was also missing.

Take a peek at this investor’s presentation and move down to slide 6 http://s21.q4cdn.com/892601718/files/doc_presentations/2016/…

If you look at their December quarter in 2015 they grew 37% faster than their nearest competitor. I was going from memory here and thought the difference was more like 25%. But even that number doesn’t tell much. It’s all relative, and you need to see the chart to appreciate its meaning. The chart also includes important milestones along the way, so you can see when Cloud Xpress was added to the mix, and how that made the curve look even more exponential.

Sorry for omitting this information.

Best,
–Kevin

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I think it might also be appropriate if I refrain from posting for a bit if that is affecting people’s mindset. Especially if folks are overallocating. Would that be helpful

no, it would NOT!

please keep posting, yours are among the best, most detailed posts on this board (and all of Fooldom, judging by the purple crown you have)!

Brian

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a. It had a frothy valuation then, and has a frothy valuation now, although less so.

Definitely on the right track…I think it just depends what you mean. We should of course remember that the GAAP PE is still around 40 (I know we don’t use GAAP, but remember that it’s plastered everywhere if someone isn’t looking as deeply as we do). So it certainly doesn’t look “cheap.” But it used to be 60, 80, etc. So it looks frothy at a glance, and always has, but if we’ve learned anything from Saul, we know that the real question is: How does the stock price compare to the company growth and earnings? With the stock price shrinkage, have the company’s earnings slowed down too? No, I don’t think so. YPEG is around 0.2. Are they about to slow down? Kevin’s posts assure me that they are not slowing down.

It’s pretty much that simple. Mr Market is giving us a better price than we could get a year ago. As Saul said recently, sometimes all companies need to do for the stock price to climb, is exactly what they said they would do. I certainly don’t have a crystal ball, but that sure seems true of Infinera right now.

I sold 10% of my position on a day when the stock was edging up near $16 (only because my position was too big…it’s still my 3rd largest position). Not that we’re sitting at 14.50 or so, I’m trying to decide whether to buy some back before earnings, or hold off just in case they say something on the call that makes Mr Market give us an even better price. But I’m not worried about the company in the short or long term.

And I think eventually the company growth and earnings will be reflected in stock price growth (again). When? Get your crystal balls out to answer that one.

Please keep posting, Kevin.

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Kevin I want to encourage you to keep posting, I feel like I understand INFN better than any company I own and that is thanks to all your hard work. As I have said many times before INFN is my largest holding, thanks to you and gledmo and others I was confident enough to load up back in '11 and '12 when the stock was banging around 6 bucks, so my basis cost is 6 and pennies and I have more than doubled that in four years and expect to do better going forward.
So keep up the good work and thanks for all of it.
Mike

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Kevin, I’m not on the boards much anymore, but I do occasionally quickly skim over the lists of posts when I have time, and I often read yours. I hope that you’ll keep posting about INFN.

I’m long INFN, but I’m more in Monkey’s camp than yours. My concern – which may not be justified, and I’d love to hear more about it – is that the business, as a cyclical, is doing well now but is just going to plow all of that profit back into R&D so it can stay ahead of the competition in the next cycle. Then we go into the down cycle, when the company’s vertical integration works against them and their short lead times (generally a big positive IMHO) create uncertainty about the future for investors – there’s no backlog to look to and work through. Rinse and repeat, cycle to cycle, with shareholders never really ending up with much to show for it.

It’s true that the stock popped recently, but I think one could also just dismiss that as the usual musical chairs (musical shares?) that we sometimes see with cyclicals, where people try to jump in at the beginning of the up-cycle to ride the stock up – and then bail.

I really have no idea. I was invested in INFN back in 2010 or 2011, and I ultimately lost patience. If I had held until this recent pop, I would have done “okay” but only if I had sold near the peak. And maybe I would have, but I also tend to make another mistake, which is to think that, when the market finally turns, it has “caught on” to what I see in a company and gains will continue to accumulate. Then it turns out the market is just as irrational as always (duh), and the gains were driven by something completely different and ephemeral, and the stock is back to its usual ways.

I have no clue what the future holds for INFN the stock. I think Infinera the business is likely to continue to do well, especially as it moves into new market spaces. But not all good businesses are good investments.

Regardless, though, it’s critical to understand the business, and your posts are invaluable for that. I really appreciate them, even if I don’t get an opportunity to read all of them. The stock is a different beast, and I don’t think anyone can know what it’s going to do. Each of us just has to make our own investment decisions and do the best we can :wink:

Thanks again for all of your work! It is genuinely very helpful.
Neil

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I think it might also be appropriate if I refrain from posting for a bit if that is affecting people’s mindset. Especially if folks are overallocating. Would that be helpful?

Best,
–Kevin

Kevin:

The problem is that most often your enthusiasm has not been rebutted by any counter argument. The counter argument won’t be coming from me as I am also long INFN but I do think Denny has posted some nice material over the years for INFN every time I brought it up :wink:

That said…look at comparative charts of CSCO vs INFN or other competitors…the less impressive stock performance for INFN may be more related to industry issues than to INFN specifically.

But bandwidth needs are growing by leaps and bounds…who here thinks that need will stop???

Hard to imagine a world that doesn’t need INFN…but the unimaginable does occasionally occur.

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This thread is probably long overdue, and thanks to Monkey for starting it. As a shareholder for over 8 years, I’m very skeptical of INFN the stock and the company. The company is still very much a story stock, it’s a shareholder unfriendly company due to high executive stock compensation and the telecommunications sector is a brutal one for investing due to technology and competition/business factors.

Kevin has done a great job with the coverage and I hope he keeps it up. Yet, I’ve recognized it as over-the-top bullish and realize there has been no counter to it (Bashar where are you?). A large allocation made to INFN is pure gambling, not investing, imo. The market is not missing or mispricing a ‘hidden gem’ here, and the seemingly unaffected stock price in spite of all the ‘good news’ should be a red flag for investors.

I will hold my shares and will be as pleased as anyone if the next few years brings success to INFN investors.

conifer

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Well I think we just heard the bear case.

The company is still very much a story stock

That doesn’t make sense. 60% of the time it works every time?

it’s a shareholder unfriendly company due to high executive stock compensation and the telecommunications sector is a brutal one for investing due to technology and competition/business factors.

Which is why it’s important to know that Infinera is beating the competition, ie, growing its market share – and growing it faster than competitors.

A large allocation made to INFN is pure gambling, not investing, imo.

I realize I’m harshly picking apart your short post, but this is just such a polemical statement. INFN is demonstrably a potentially undervalued stock – not because of a story, but because of the growth numbers Infinera puts up vs the stock price.

the seemingly unaffected stock price in spite of all the ‘good news’ should be a red flag for investors.

Why?

I will hold my shares and will be as pleased as anyone if the next few years brings success to INFN investors.

Good idea. :slight_smile:

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Thank you for posting conifer - message boards in general are typically devoid of a balancing counter-argument. That said, I have some questions on your post:

  1. You say the company is still very much a story stock. Can you elaborate on that? The application of the PIC has been proven out IMO as demonstrated by the uptake in the marketplace and growing market share for INFN. The decision by the company to ‘bet the farm’ on 100G and skip over the 40G cycle has also been a correct one IMO. To what story are you referring?

  2. I agree with the concerns on exec comp and generally terrible telecom equipment industry. But there are two important points to make here. First, exec comp for a company heavily reliant upon intellectual property for a competitive advantage (and the ongoing R&D this requires) should IMO be ‘cut more slack’. Second, as I referenced in an earlier post, the traditional viewpoint of companies like INFN as being ‘pushed around’ by the capex cycles of a few big telcos is not what the current market dynamic looks like. Instead of bouncing between ATT/Verizon/L3, companies like FB/GOOGL/AMZN/MSFT are big buyers of this equipment, and that simply wasn’t the case 8 years ago when you first bought shares. I would argue that the optical networking industry has better end markets now.

  3. You state that buying INFN is gambling. Is there ANY stock, even one, that you can name with confidence that you are 100% sure of the direction of the business and stock price. This comment frankly sounds like sour grapes to me.

Sorry if this comes across as harsh, and again I welcome contra opinions, but I think these statements you make need a bit more detail to be helpful to those trying to build a bear case on INFN.

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What’s so different about now?
Well now it is growing earnings by 103% YoY - was it doing that back in 2008/10? This seems to completely validate Saul’s method - invest in the stock when the numbers look right not when the story sounds good.

Back then there were no earnings but there was massive hype and hope and the stock was over priced.

Now there is rumour and concern that Infinera is under threat from some non-entity that the press is touting around but the company is growing 100% YoY, pulling in deals faster than it can write press releases and is profitable and incredibly under valued.

When would you prefer to be owning the stock?
A

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