INFN

I mentioned on this board before that Infinera Corp (INFN) was my largest holding. In addition to my shares, I took a gamble and bought a boat load of $8 calls early 2014 and have been liquidating over the past 3 months. I really like INFN, I believe in the company and its product. I’m certain they have the best product in the market currently. Also, I believe internet traffic will continue to grow and the demand for more bandwidth is certain. INFN is my play for this sweet spot in a growth area.


Quarter	Date		Revenue	Diluted EPS & Share       P/E	
2014-Q1	4/23/2014	142.800	0.030	125435		72.89
2014-Q2	7/23/2014	165.400	0.110	126758		37.93
2014-Q3	10/22/2014	173.600	0.110	128964		42.63
2014-Q4	1/22/2015	186.200	0.130	133072		37.89
2015-Q1	ESTIMATE	186.000	0.100	136000		42.22

But with the current run, over 100% in less than a year, I am thinking INFN went too far too quickly. The revenue is growing nicely but not much is dropping to the bottom line. The share count is growing rapidly; looks like management is rewarding themselves and their employees. On the last conference call, management was projecting a larger increase in stock options that management could exercise – if the price of the share stays high.

I decided to lower my position because of what I’m learning on this board. I know they are a lot of INFN investors here, what are your thoughts? Do you think EPS growth justifies the P/E when there are so many better stocks out there? My position is now down to 3% (from over 10%).

LeogAbs

5 Likes

Lego,

I have not analyzed INFN myself, but assuming that your analysis is accurate, why would you even want to keep a 3% position?

Chris

Hi Lego,
I don’t think you can use P/E to track INFN. They just finally became profitable last year. I am just happy to see them profitable.

As far as their share compensation goes it has always been high. This is something I struggle with also but I see how far the company has come and where it is headed and I am hanging onto all of my shares for now.

They are finally coming out with a metro product and a cloud based product. The DTN has always been in the data centers but now they are making a market specifically for the Data centers.

When these products come out they will have more revenues to grow and if you look at their revenues last quarter, up over 31%, we should see that only growing. They have the long haul market almost built out and now the companies that have bought their equipment will start filling them up with blades. These will be higher margin products.

Now with the metro and cloud products we should have at least 3 more years of really good growth. While I track INFN with the P/S and now P/E it is really hard to even use it. It isn’t very reliable because its so volatile. So I am watching the growth of Revenue and Earnings. Now that earnings are positive we should only see it growing especially with all the data that just keeps growing. We are now seeing 100 gig pipes at the local level and 500 gig in the long haul. This is just going to keep growing.

I have about 6% of my portfolio in INFN and I am holding onto them for at least two years.

Andy

3 Likes

Chris,

I have not analyzed INFN myself, but assuming that your analysis is accurate, why would you even want to keep a 3% position?

Why? Potential

INFN has a disruptive technology (smaller space requirement, very energy efficient, quick deployment, adding bandwidth via software controlled, etc.)

They are displacing the incumbent

They are building footprint now, stealing/adding many tier 1&2 customers worldwide

Their manufacturing is vertically align

They are operating in a growth industry – internet traffic/bandwidth

Potential takeover target

I am wrestling with potential and developing growth versus potential and sustained growth. This is one of the philosophical shifts I’m trying to make now.

The funny thing was, as I was unloading INFN, I was selling for higher prices each week. It was like, why am I selling my winner? Then again, it was fun to see my largest holding double and call options turning 3 and 4 baggers!

The question is: is it better to own 7% of SWKS and 3%INFN or 10% of SWKS?

LegoAbs

Why? Potential

INFN has a disruptive technology (smaller space requirement, very energy efficient, quick deployment, adding bandwidth via software controlled, etc.)

They are displacing the incumbent

They are building footprint now, stealing/adding many tier 1&2 customers worldwide

Their manufacturing is vertically align

They are operating in a growth industry – internet traffic/bandwidth

Potential takeover target

Lego,

Isn’t your goal to increase the value of your portfolio? For this to happen the value of the stocks you own must go up. Your reasons for holding are all about growth and potential. Growth of what? Growth prospects for the top line are an important criterion as you usually (usually because it is possible to keep the top line flat and still grow the bottom line through margin improvement like POL is doing) need the top line to grow for the bottom line to grow. You usually need the bottom line to grow to increase the share price (assuming constant P/E), here an exception is that the share count could decrease with flat bottom line growth. If the EPS grows continually then the stock price must eventually rise.

So back to your reasons, you talked only about potential growth. The quantitative aspect of analysis was skipped over. What do you think the company is worth and why? How much of this potential sales growth will translate growth and how much of that will translate to earnings growth and how much will be taken away by share dilution. Once you have estimates for these numbers then you can figure what is a reasonable P/E and project forward what you think the shares should be worth. IF you do the same for SWKS then you can make a decision on whether you should own 10% SWKS or 7% SWKS + 3% INFN. Goodluck.

Chris

2 Likes

I started buying INFN in '08, and continued to do so for 5 years during weakness. I allocated more capital to INFN than any other, ever. It finally has paid off, and I sold my first tranche at $16.

Compensation has always been painfully high and Tom Engle has banged the table on this many times. The poster DutchNotMuch has offered an interesting bear case, but the future now does look promising. I doubt I will sell any more shares for a year or two given all the ‘good news’ lately, but the industry is not very transparent and the company is not very shareholder friendly.

conifer