While the slow grind higher in big carrier network spending has not led to a capital expenditure explosion, the continued capacity and latency build out of the Internet has some companies’ growth starting to surge. With huge deals being made by cable companies and program providers for improved latency and bandwidth, the need for speed in the Internet has never been so important. The analysts at Goldman Sachs recognized this, and their stock upgrades have caused many stocks in the sector to jump.
With this year’s Optical Fiber Conference, OFC 2014, in full swing in San Francisco, some of the world’s leading companies for advancing optical solutions are in the spotlight. The Goldman Sachs upgrade has made the glare even brighter, and investors are noticing. In her research report, Goldman’s Simona Jankowski estimates 100G optical system shipments “have approximately a 15% point gross margin advantage” relative to 10G counterparts, and she sees this delta boosting certain companies’ margins as 100G “increases from mid-50% of total product revenue in 2013 to mid-70% in 2014.” The bottom line is the need for speed is more evident now than ever before.
Calix Inc. (NYSE: CALX) and Infinera Corp. (NASDAQ: INFN) were upgraded at Goldman Sachs, but as you will see others seem to be benefiting from the call as well. Some have even recently received positive analyst calls from other firms. Here are some of the top telecom and optical equipment stocks likely to benefit directly or indirectly from the Goldman Sachs upgrades.
Calix Inc. (NYSE: CALX) could be a big winner and was upgraded by Goldman Sachs from Sell to Neutral. The company provides broadband communications access systems and software for fiber and copper-based network architectures that enable communications service providers to connect to their residential and business subscribers in North America. The stock was also one of our 10 top tech stocks to buy under $10. The consensus price target is $12.17. Calix closed Wednesday at $8.89.
Infinera Corp. (NASDAQ: INFN) stock jumped Wednesday after Goldman Sachs upgraded the fiber-optic parts maker to a Buy rating on views that the fiber-optics company’s telecom customers will upgrade networks to 100 gigabit-per-second technology. The Goldman Sachs analyst also wrote in her report that she believes that Infinera has regained Level 3 as a customer, which could be huge for the stock. The consensus price target is posted at $12.17. Infinera closed Wednesday at $9.71.
ADTRAN Inc. (NASDAQ: ADTN) is a top name to buy in the sector. The company is a leading global provider of networking and communications equipment. ADTRAN’s products enable voice, data, video and Internet communications across a variety of network infrastructures. ADTRAN solutions are currently in use by service providers, private enterprises, government organizations and millions of individual users worldwide. The Thomson/First Call consensus price target for the stock is $26.72. ADTRAN closed Wednesday at $26.68 a share.
Ciena Corp. (NYSE: CIEN) is a company that many other analysts believe could be the top beneficiary of the increase in spending. Ciena management is optimistic about its prospects in the United States and in markets such as Brazil and India, where it has landed Tier 1 design wins. Recently, it also won a contract from Cablevision Argentina, which is a leading cable TV and Internet services provider in Argentina, to enhance its broadband network countrywide. The company is rapidly reducing its losses, and the earnings growth outlook for the next five years is also quite promising. According to Yahoo! Finance, investors can expect Ciena’s earnings to improve at an annual rate of 16.7% for the next five years. The consensus price target for the stock is $27.84 versus $23.88 as of Wednesday’s close.
Cyan Inc. (NYSE: CYNI) has missed two quarters in a row following its IPO. In addition, management has materially lowered expectations for 2014 growth. On the positive side, the stock now discounts a lot of bad news and may provide solid upside as business improves. The company provides carrier-grade networking solutions that transform disparate and inefficient legacy networks into open, high-performance networks. The consensus price target is $3.97. Cyan closed Wednesday at $3.92.
Finisar Corp. (NASDAQ: FNSR) was recently upgraded elsewhere and the analyst is very bullish on the stock. Jefferies analyst James Kisner recently raised his rating on the shares to Buy from Hold, and raised his price target to $30 from $24, after conversations with “industry contacts” suggest to him “very strong demand trends in data center optics and a good backdrop for Telecom optical spend in 2014.” The consensus price target is $28.32. Finisar closed Wednesday at $24.04.
JDS Uniphase Corp. (NASDAQ: JDSU) was a pioneer of the optical revolution that began in the 1990s. The company performed ahead of expectations in its recently reported second quarter and issued a strong outlook. JDS Uniphase management has always been confident about the prospects of the business as the need for bandwidth across the world increases. As a result, the company is seeing strong demand in the Americas for its 100G products and LTE solutions. The consensus price target is $15.54. The stock closed Wednesday at $14.01.
NeoPhotonics Corp. (NYSE: NPTN) is a leading provider of fiber-optic components that enable high-speed data transmission and efficient allocation of bandwidth to the communication network and data center spaces. The company’s differentiated photonic integrated circuit technology, used in designing products for: speed (high data rate over fiber), agility (allocating bandwidth) and access (network connection), allows for superior cost-effectiveness through lower power consumption and increased port density. The consensus price target is $8.72 versus $8.18 on Wednesday.
The key takeaway from the Optical Fiber Conference and the upgrade from Goldman Sachs is that the demand for optical equipment in markets, such as global datacom and U.S. and Chinese telecom, is solid and based on real and sustainable multiyear growth drivers. The incredible and insatiable need for bandwidth and latency is sparking a huge upturn for many companies that were left in the dirt when the tech bubble burst in 2000. The good thing for investors is that many of these top names in the field may have lots of room to run.