INFN: Deutsche Bank re-iterates buy @ 26…

Deutsche Bank’s Vijay Bhagavath today reiterates a Buy rating on shares of optical networking equipment provider Infinera (INFN), and a $26 price target, after making “checks” of the sales channle for its gear that show opportunities in the data center.

In particular, Bhagavath is responding to the introduction last week of optical plug-in cards for routing equipment from Inphi (IPHI), which had some on the Street worried that such products might eat into the market for equipment from Infinera and Ciena (CIEN).

Inphi made the products in collaboration with Microsoft’s (MSFT) cloud computing business, and Microsoft says the Inphi parts are a more economical alternative for its purposes than the Infinera and Ciena offerings.

The Street has over-reacted, writes Bhagavath:

We maintain conviction on mid double digit CAGR revenue ramp of INFN’s Datacenter Optical solutions at Web 2.0 and Cloud Providers such as GOOGL, FB, AWS, etc. Our research notes strength in rollouts of INFN’s 100G Cloud Xpress systems at major Web 2.0s. We have conviction in our modeled view of INFN’s Cloud Xpress sales as a +10% contributor to our FY17 revenue estimate. We think the street over-reaction to the IPHI 100G announcement (MSFT, likely first customer) is driven by fears around a meaningful haircut to mid double digit revenue growth expectations for INFN’s Datacenter Optical business, based on MSFT and other Web 2.0s likely utilizing Pluggable Optical Modules (integrated into Switches and Routers) instead of 100G+ Datacenter Optical systems from INFN, designed to operationally perform at Metro and Long Haul distances, and scale to Terabit speeds.

He thinks this market will be stratified:

Our key insight is that the Datacenter Optical Interconnect market (+$4-5B TAM; refer to our INFN initiation) likely stratifies into: 1) a “Pluggable Optical Modules” segment that is an attach rate into Switches and Routers, and intended primarily for short reach – i.e. 500m to 10km, given the use of QSFP28 modules; and, 2) a Metro and Long Haul” segment for interconnecting datacenters spaced 10s of km metro distances to 1000s of km long haul. INFN, in our view, is not likely to enter the “Pluggable Optical Modules” market, and instead, focus on gaining Web 2.0 and carrier market share for Terabit scale Optical systems that reliably perform at 10s to 1000s km distances.