Finisar’s Q408 Earnings Call was June 12. Since then the stock has declined nearly 25%, reflecting what we believe is a general dissatisfaction with revenue growth guidance of 10-15%. This guidance appears conservative.
October 1, 2002 is the generally agreed upon day that marks the bottom of the bubble (Nasdaq low was Oct 9, 2002)and is a useful date to compare post-apocalyptic performance.
Finisar is the only optical component stock with a post-bubble positive return. During FY08 Finisar lost it’s ‘favorite son’ status when it failed to deliver expected growth.
However, its decline should be viewed as a mean reversion, not a decline of fortune. I believed the positive sentiment attached to Finisar in 2006 was absurd (see “Why I Don’t Own Optical Component Stocks (yet)”) but believe the negative sentiment today to be equally absurd.
FY09 Revenue Guidance
Finisar provided FY09 revenue guidance of +10-15% (exclusive of the Optium merger now underway). We like to look at the company as three separate segments: Test, 1-8G (SFP’s, Mostly Enterprise market driven) and everything else which we refer to as 10G/Telecom. 10G/Telecom is the growth segment of the company, while the 1-8G segment is mature from a unit volume standpoint. The company provides excellent data on segment performance.
Finisar’s total revenue for 2007 was $440M. About $267M was 1-8G, $39M was test and measurement, and $135M was 10G and Telecom. The company would need to reach revenues of $506M to grow 15% – what must happen to hit this?
Summary: Assuming all other businesses are flat Finisar needs to grow it’s 10G/Telecom units 45% to reach the high end of revenue guidance. The below graph illustrates the segment growth required to hit 15% revenue growth.
The risks to this appear reasonable:
It is possible to see a scenario where Finisar grows 20% over the next year barring any macro meltdowns. It is tough to see how it grows only 10%.