China Optical Demand Still Red Hot: 4 Stocks to Buy With Big Upside Potential

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The more speed, latency, gaming, cloud computing, storage and streaming demand of the internet, the more the top companies working on the metro build-outs and 100G may continue to blow out earnings. With huge growth around the world, and especially in China, many of the top companies that are providing the optical products for 100G applications remain strong. 100G Metro solutions are the most effective way to simply transport data in metro and enterprise applications.

The worries that have hit the sector were for a potential slowdown in China from the blistering pace set over the past couple of years. A new Stifel research report makes the case that based on data its analysts are seeing, the demand is China is intact and the pricing remains rational.

The Stifel analysts noted:

Management offered commentary indicating China demand trends remain intact, benefiting from continued 100G port count growth, provincial build outs, metro deployments beginning to ramp, and beginning CFP2-ACO deployments. Regarding pricing, management noted annual pricing negotiations came in at the low end of the historical 10%-15% range, suggesting the industry is benefiting from prior cycle consolidation, solid demand, capacity constraints, and technology leadership offering barriers to entry for several product lines.

Four stocks are rated Buy at Stifel, and the analysts feel that they will continue to benefit not only from strength in China, but possibly elsewhere around the globe as well.

Fabrinet

This is one the top companies riding the wave of enterprise data center growth. Fabrinet Inc. (NYSE: FN) is a leading provider of advanced optical packaging and precision optical, electro-mechanical and electronic manufacturing services to original equipment manufacturers of complex products, such as optical communication components, modules and subsystems, industrial lasers and sensors.

Fabrinet offers a broad range of advanced optical and electro-mechanical capabilities across the entire manufacturing process, including process design and engineering, supply chain management, manufacturing, advanced packaging, integration, final assembly and test. Fabrinet focuses on production of high-complexity products in any mix and any volume.

The company reports earnings next week, and any positives, especially looking forward should be rewarded.

The Stifel price target for the shares is $50, and the Wall Street consensus target is $52.29. Shares closed Wednesday at $42.12.

Finisar

This stock took off in the fall and has pulled back recently, offering a very good entry point for investors. Finisar Corp. (NASDAQ: FNSR) provides optical subsystems and components for data communication and telecommunication applications in the United States, Malaysia, China and internationally.

Its optical subsystems primarily consist of transmitters, receivers, transceivers, transponders and active optical cables that provide the fundamental optical-electrical or optoelectronic interface for interconnecting the electronic equipment used in communication networks, including the switches, routers and servers used in wireline networks, as well as the antennas and base stations used in wireless networks.

The company also offers wavelength selective switches, which are used to switch network traffic from one optical fiber to multiple other fibers without converting to an electronic signal. In addition, it provides optical components comprising packaged lasers, receivers and photodetectors for data communication and telecommunication applications, as well as passive optical components for telecommunication applications.

The analysts noted in a recent report:

Our research suggests demand for datacom products is likely to remain robust in 2017, with Finisar having unmatched breadth of products and vertically integrated capacity that uniquely allows the company to address demand requirements. We see 100G driving growth again, which we note made up 30%-35% of Finisar’s datacom revenue in its last reported quarter (October).

The $42 Stifel price target is in line with the consensus target of $42.20. The shares closed most recently at $29.65.