| 2016-10-11 13:37:05|
FNSR, ACIA… 13:37 10/11 10/11/16
As China lifts optical networking demand, Goldman calls out Finisar as winner
Finisar (FNSR), Acacia (ACIA) and other best-in-breed optical networking companies look set to outperform amid sharply increased Chinese demand, though the sector's triple-digit rally has also created valuation risks for Lumentum (LITE), Wall Street analysts argued Tuesday. NEEDHAM BULLISH ON ACACIA: Needham analyst Alex Henderson reiterated a Buy rating on Acacia Communications while raising his price target on the shares to $125 from $100. The analyst highlights the "substantial" positive headlines in the networking market, including supply requests from state-owned China Mobile (CHL) that suggest 2017 component orders 30%-60% above this year's levels, and he argues that Acacia looks both supply- and capacity-constrained as demand growth outstrips production into next summer or longer. The company's recent third quarter preannouncement beat Wall Street estimates, and Henderson believes Acacia is "likely" to guide for another outperformance in the December quarter, potentially 5%-15% above current forecasts. GOLDMAN SAYS BUY FINISAR, SELL LUMENTUM: As part of larger note on the optical networking component space, Goldman Sachs analyst Doug Clark upgraded Finisar to Buy, downgraded Lumentum to Sell and remained Neutral on Acacia and Infinera (INFN), arguing that stock selection is key given the sector's run-up in 2016. The analyst notes that Chinese demand is continuing and optical components are also making inroads in metropolitan telecom and datacenter upgrade cycles, leaving the "well positioned," relatively cheap, and vertically integrated Finisar ready to deliver industry-leading gross margin expansion. On the other hand, Clark says Lumentum's "premium" valuation already reflects potential upside from industry tailwinds, while its delayed, and potentially substitutive rather than additive, product launches raise competitive concerns. Meanwhile, a highly-concentrated client base keeps Clark on the sidelines for Acacia despite its disruptive potential and high growth. PRICE ACTION: Shares of Acacia are down 1.3% to $91.27 in afternoon trading, while Finisar and Lumentum are down 2.5% and 9%, respectively.