Fiber Will Connect Everything: 5 Top Stocks to Buy With Big Upside Potential

April 21, 2017 by Lee Jackson

The fact that everything runs faster through fiber optics has been known for years, and is hardly a big secret. The reality is fiber connectivity is now fast becoming the growth driver as demand for latency has increased with huge increases in cloud computing and storage, streaming content and data, and much more. Enterprise and cloud data center build-outs continue to increase in size and scale, and the future looks incredibly bright for the top companies in the arena.

A new Deutsche Bank research report focuses on the incredible growth of fiber connectivity. It cites fiber to the home, data center build-outs and the potential down the road of fiber to macro, small cells for wireless. Five top companies are the industry leaders and all are rated Buy at Deutsche Bank.

Acacia Communications

This had a red-hot IPO last year and has backed up huge since a secondary offering in the fall. The company is one of the top Deutsche Bank small cap ideas. Acacia Communications Inc. (NASDAQ: ACIA) is a leading supplier of high-speed coherent optical interconnect products to network equipment manufacturers, hyperscale cloud companies and service providers.

The company’s foundation is in its Digital Signal Processing (DSP) and a unique approach with its silicon-based photonic integrated circuit (SiPhi PIC). The company primarily combines the DSP and PIC to create modules, which are integrated into optical/networking equipment to provide high-speed optical interconnect.

The stock was hit yet again after posting solid fourth-quarter numbers but offering very tepid guidance for the first quarter. Many feel that this could be the best tech value now.

The analysts noted this:

We maintain conviction on our +20-25% compounded annual growth rate for Acacia, with the growth story sponsored by +35% of the company’s revenue mix driven by Data Center Optical Interconnects (+40-50% capital expenditure intensity) and +50% of the mix driven by Metro Optical (low teens capex intensity).

The Deutsche Bank price target is a stunning $100, and the Wall Street consensus target is $78.57. Shares closed Thursday at $53.56.

Ciena

This company has had a very up and down 52 weeks, and it has frequently been the subject of takeover rumors. Ciena Corp. (NASDAQ: CIEN) is a vendor for high-capacity optical transport and Ethernet switching equipment to carriers, enterprises, cable operators and governments. It specializes in transitioning legacy communications networks to converged, next-generation architectures capable of efficiently delivering a broader mix of high bandwidth services.

The company’s Converged Packet Optical segment offers networking solutions optimized for the convergence of coherent optical transport, Optical Transport Network (OTN) switching and packet switching. Its products comprise the 6500 Packet-Optical Platform, 5430 Reconfigurable Switching System, CoreDirector Multiservice Optical Switches and OTN configuration for the 5410 Reconfigurable Switching System.

The analyst report noted:

Ciena is likely to be a primary beneficiary of AT&T’s multi-year Optical Network upgrade plans– i.e. The company’s Metro and Long-haul Networks scaling from 10/40G to100G and 200/400G-based on Ciena’s incumbency advantage and Software Defined Packet Optical systems (for ratcheting up speeds from 100G to 200G and 400G, via Software) at AT&T in Metro and Long-haul Packet/Optical.

The $28 Deutsche Bank price target is essentially in line with the consensus target of $28.72. The shares closed most recently at $21.88.

Cisco

This is a top mega-cap technology stock pick at Deutsche Bank for 2017. Cisco Systems Inc. (NASDAQ: CSCO) designs, manufactures and sells internet protocol (IP) based networking products and services related to the communications and information technology industry worldwide.

It provides switching products, including fixed-configuration and modular switches, and storage products that provide connectivity to end users, workstations, IP phones, wireless access points and servers, as well as next-generation network routing products that interconnect public and private wireline and mobile networks for mobile, data, voice and video applications.

Deutsche Bank likes the company’s stellar balance sheet, and the ability for the company’s gross margins to move close to the 65% range on a consistent basis as it moves away from the legacy products sold for switching and routing. Cisco is another company that could benefit from the tax on overseas money being lowered as it has a whopping $70 billion in cash, 90% of which is overseas.

The report noted:

We see Cisco likely to take increasing share of wallet from 100G+ Data Center, Metro, and Long Haul Optical networking rollouts at major Clouds, Telcos and Cablecos, worldwide–driven primarily by the architectural differentiation in IP Dense Wavelength Division Multiplexing: Optical and Routing–Platforms and Software Automation.

Deutsche Bank also thinks the stock is cheap at 11 times price to earnings on the firm’s fiscal 2019 estimates.

Cisco shareholders receive 3.55% dividend. Deutsche Bank has a $42 price target, and the consensus target is $35.39. Shares closed Thursday at $32.80.

Commscope

This is another top idea at Deutsche Bank. Commscope Holding Co. Inc. (NASDAQ: COMM) is a leading provider of antennas, cabling connectors and other connectivity equipment for enterprise and service provider customers. The company is a market leader in its three segments: Wireless, Enterprise and Broadband.

The company reported strong fourth-quarter results but guidance for the first quarter missed consensus estimates. 2017 guidance as a whole was soft but mostly in line. North American fiber and wireless demand drove the outperformance, and network densification continues to be a positive trend. International markets were weak but fiber, deleveraging, cost synergies and potential regulatory upside stories are intact.

Deutsche Bank feels that company will be a big winner in data center build-out and fiber to the home arenas. The project the company has a 35% or so share of the fiber connectivity market, and in the firm’s view, a meaningful share of design wins at major U.S. carriers and enterprise buildings.

The $42 Deutsche Bank price target was raised to $50, while the consensus target is $44.33. The stock closed Thursday at $41.63.

Corning

This was a huge player in the fiber build-outs in the 1990s and may be ready to ramp back up for new deployments. Corning Inc. (NYSE: GLW) is one of the world’s leading innovators in materials science. For more than 160 years, Corning has applied its unparalleled expertise in specialty glass, ceramics and optical physics.

Its products enable diverse industries such as consumer electronics, telecommunications, transportation and life sciences. They include damage-resistant cover glass for smartphones and tablets; precision glass for advanced displays; optical fiber, wireless technologies and connectivity solutions for high-speed communications networks; trusted products that accelerate drug discovery and manufacturing; and emissions-control products for cars, trucks and off-road vehicles.

The analysts see the company as a winner in not only the new 5G wireless, but also strong Internet of Things applications. They feel both areas are infrastructure opportunities for the company given what they say is the robust demand for IoT connectivity and 5G infrastructure builds. The analysts also note cloud demand as a new growth driver for optical connectivity.

Corning investors receive a 2.31% dividend. The Deutsche Bank price target is $42. The consensus for the stock is $27.07, and shares closed Thursday at $27.11.

The revolution in data networking will only continue to grow as consumer and business demand for the Internet of Things and beyond continues to manifest. While attractive now, these stocks are only suitable for accounts with a high risk tolerance, as earnings or guidance misses can cause big volatility.

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