Oclaro rises as analyst makes case for potential acquisition
Shares of Oclaro (OCLR) are on the rise after MKM Partners analyst Michael Genovese recommended investors buy the stock, citing an uptick in Chinese market commentary and noting that the company is in a "good position" to choose an acquisition partner and create an even stronger company going forward. Among potential buyers, the analyst argued that Oclaro may be an especially attractive acquisition candidate for Finisar (FNSR), while Inphi (IPHI) may be a "good strategic fit." ATTRACTIVE ACQUISITION CANDIDATE: In a research note to investors, MKM Partners' Genovese reiterated a Buy rating on Oclaro. The analyst argued that he sees this as a "good entry point" because the company's commentary on the timing of a Chinese market recovery has slightly upticked since earnings. Oclaro's leadership in Indium Phosphide Datacom lasers positions it well for market leadership in upcoming 400G/600G/1.2Tbps Datacom and Telecom product cycles, putting Oclaro in a "good position" to choose an acquisition partner and create an even stronger company going forward, he argues. According to his industry checks, Oclaro makes the best Datacom lasers in the industry, and makes both directly modulated lasers and electro-absorption modulated lasers. Therefore, Genevose believes it would be an "especially attractive" acquisition candidate for Finisar. Datacom is Finisar's largest product category, but the company makes directly modulated lasers only and not electro-absorption modulated lasers, he pointed out, adding that it may need Oclaro if it wants to remain competitive in Datacom at speeds of 400G and above. While merging with Finisar would give Oclaro greater scale in the Optical market, the analyst said that combining with a Silicon player may create an even stronger company. As the industry moves to 400G and above, likely starting in early 2019, the combination of Oclaro's Indium Phosphide lasers and transceiver/modulator PICs would combine well with a Silicon player's DSP, drivers and amps to create an Optical module powerhouse, Genovese added. He thinks a company like Inphi is a perfect example of a good strategic fit with Oclaro. PRICE ACTION: In morning trading, shares of Oclaro have gained nearly 5% to $7.20. Year-to-date the stock is down 20%.