Needham's top networking/optical picks

Needham’s top networking/optical picks: LITE, FN, OCLR, ANET, GIMO

http://blogs.barrons.com/techtraderdaily/2015/12/30/lumentum…

Needham & Co.’s Alex Henderson today advises fiber optics enthusiasts to look to component makers, such as Lumentum (LITE), in 2016, more so than systems makers such as Ciena (CIEN), with the former having greater revenue “upside” and margin “leverage.”

In fact, he suggests they are at the start of a great five-year run through 2020 based on surging demand for things such as 100-gigabit-per-second transceivers.

Henderson sees good trends for fiber-optic buildout in data centers and in the “metro” market of telecom lines, and although he likes three systems vendors — Ciena, Infinera (INFN), and Xtera Communications (XCOM), he prefers their suppliers:

We think good returns are possible with all three of these names. However, we think there is more upside at many of the component names. We see more upside to revenues, better margin leverage, and more room for valuation improvements with the component names. We point out the current supply constraints on broad classes of Optical components at the end of CY15, which we expect to persist through CY16.

Henderson thinks things get even better after this year for component vendors:

We think CY16 will be a good year for Optical. We think CY17 and CY18 will be excellent years for Optical. The driver of this should be the continuing strong growth in the DCI market and the substantial ramp-up of the Metro Core Market. We strongly believe CY16 is the beginning of the Metro 100G/200G cycle, which should last through CY2020:

Lumentum, one half of the splitting up of JDSU that happened this summer (the other is Viavi Solutions (VIAV)), is his “single best idea” for 2016:

As the company moves into CY16, LITE has roughly 50% of its optical product line in sold- out conditions well into CY16. The Industrial laser business is also likely to accelerate. The interesting aspect of these supply constraints is that they reflect strong demand across numerous segments of the Optical System end markets, including Long-Haul and DCI with Coherent modulators, Metro with ROADMs, and Access Metro with the T-XFP 10G transceivers. LITE is currently trading at 13x EV/E on CY16 estimates and just 1.1x EV/Sales. LITE is upbeat in its outlook and we think there is upside to Revenues, Gross Margins, Operating Margins and valuation. Our target price is $30 per share, or 44% upside potential, based on 20x EV/E and 1.6x EV/Sales.

He has nice things to say about Fabrinet (FN), too: “Priced at just 0.7x EV/Sales and 9x EV/E, we see FN as an inexpensive, low risk vehicle to attain exposure to accelerating and broadening optical demand.”

And Oclaro (OCLR): “the primary reason we are recommending the stock is the ACO 100G Coherent pluggable. Oclaro is first to market in this emerging category and if they ramp production smoothly we think they can sell whatever they can produce.”

Two other picks, in networking, are Gigamon (GIMO) and Arista Networks (ANET).

Of the former, he writes “After a strong year in CY15, Gigamon is likely to produce a more “normalized” year with growth in the 20% plus vicinity against tough comps with a gradual upward bias to Gross Margins driven by increasing security-driven transactions.”

Of Arista he writes

There are two major events on the horizon for Arista, including the ramp of the 25G architectures in CY2H16 and the launch of the Jericho chip by Broadcom, which will allow Arista’s switches to perform the full functionality of an Edge Router at substantially lower costs. We think Arista could pick up 3-5 points of market share, which we calculate could drive over 30% top-Line growth. Arista’s domestic-centric structure is also a positive, since it reduces Arista’s exposure to emerging markets. We reiterate our Buy rating and $105 target price.

I recently got back into Arista with a small allocation. I was also aware of Oclaro (OCLR) as an early supplier for Infinera. I’m now very curious about Lumentum (LITE). Prior to the Transmode acquisition, Infinera was a lot less reliant on third party component suppliers than their competitors. This was because they have their own fab in which to construct PICs and these PICs include many of the necessary components as part of an integrated design. This isn’t the case for the legacy Transmode products, and these products cover all of the metro market. I’m adding LITE and OCLR to my short list and will likely check out Fabrinet (FN)and Gigamon (GIMO) as well. No positions yet.

Best,
–Kevin

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Found it. JDSU (now Lumentum) was a supplier and collaborator to Infinera for some of their solutions.

http://finance.yahoo.com/news/JDSU-Highlights-Collaborative-…

“Collaboration with suppliers like JDSU provides a strategic advantage to Infinera,” said Tom Fallon, CEO at Infinera.“Together we bring innovative solutions to market that unleash the market potential of optical transport networks for global network operators.”

I am definitely checking into LITE.

Best,
–Kevin

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I recently got back into Arista with a small allocation.

I’ve got a small allocation in ANET, up about 20% in a year (I bought before the lawsuit), plus some sold PUTS. Lately I’ve been thinking about investing more, as I really believe the story and think that they could end up with big disruptive growth at Cisco’s expense.

Has anyone done a deeper analysis of this stock here?

Hello,

I started a position in ANET after it dropped from news about the Cisco lawsuit. My assessment is that the lawsuit is not a big risk as it is about software in which there is a software fix should Cisco prevail on its claims. (No opinion about who will win the patents case)

The fact that Cisco brought the suit seems to confirm that ANET is beating Cisco in the marketplace. Their market share has been expanding while Cisco’s continues to decline. (albeit, from a very high base)

The clincher for me to invest in ANET was direct conversation with players from the cloud side of Amazon and Microsoft that ANET’s tech was superior in performance and price.

I think that ANET is one of those growing enterprises that won’t offer compelling instant value from a price perspective, but will reward shareholders with growth exceeding expectations so that very good returns are realized.

Best regards,

Mike

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here is a list of some “fiber” related stocks I had maintained long ago. Cleaned it up for takeovers and added a couple from Kenvin’s list

http://stockcharts.com/freecharts/candleglance.html?FNSR,LIT…

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