Microsoft, Amazon, Google Cloud Growth Lifts Fiber-Optics Firms
You might think the race to the cloud mostly benefits leading cloud services providers, such as Microsoft ( MSFT ), Amazon.com ( AMZN ) and Alphabet ‘s ( GOOGL ) Google. Of all the electronics, communications and digitally inspired IBD industry groups, the Telecom-Fiber Optics industry group ranks the highest. It’s No. 6, up from No. 9 a month ago, No. 95 two months ago and No. 168 three months ago. What’s different from a few months ago? On March 9, Microsoft Azure Chief Technology Officer Mark Russinovich told the Open Compute Project summit that Microsoft will grow from 22 to 28 data centers in 2016. Azure is Microsoft’s cloud business. Also, Google announced March 22 that it would add 12 new data center regions globally by the end of 2017, including two in the U.S., nearly doubling its existing 14 regions. And cloud leader Amazon Web Services, a rising business of Amazon.com, will grow from 12 regional clouds to 17 “in the coming year,” CEO Jeff Bezos said April 6 in his annual letter to shareholders. Fiber-optic developers that create the high-speed lines and connections for data centers will be among those companies benefiting from this expansion. “The first two new data centers (Oregon and Tokyo) will come online later this year, with the others to be launched in 2017,” said Jefferies analyst George Notter, regarding the Google announcement, in a March research note. “Based on our conversations with industry contacts, we think the additional investments are great news for Infinera ( INFN ), Ciena ( CIEN ), and to a much lesser extent, Alcatel-Lucent.” He cited the three as Google’s vendors for wavelength division multiplexing (WDM, an optics technology) and Infinera’s Cloud Xpress as Google’s preferred metro data center interconnect (DCI) platform, “although we wouldn’t be surprised if they (Google) eventually operationalized other vendors as well.” Infinera Down After Analyst Calls Stock ‘Way Too Cheap’ At the time, March 24, Infinera was trading near 15 — “way too cheap,” Notter said. He reiterated Infinera’s buy rating with a 22.50 price target. Since then Infinera stock has fallen, after tumbling 2.7% Tuesday to 14.58, 42% off a nine-year high of 25.24 touched Aug. 18. But it was a tough day for the sector overall. Rival Ciena, however, fell 3% Tuesday, to 17.27, 33% off a 16-month high 25.77 touched July 23. Heading toward its first-quarter earnings release April 27 after the market close, Infinera is expected to report continuing choppy earnings growth on slower sales growth. Analysts polled by Thomson Reuters expect earnings up 6% to 17 cents per share minus items, on sales up 31% to $246 million. While earnings are expected to top the year-earlier 16 cents per share, it’s a tough comparison to the Q1 2015’s 433% EPS growth. With a market cap of $2.06 billion, Infinera is the second-largest company in the IBD fiber group, following Ciena’s $2.4 billion, but neither is among the healthiest. Ciena carries an IBD Composite Rating of 72, and Infinera has a 67. The healthiest, both with CRs of 97, are Lumentum Holdings ( LITE ) with $1.45 billion in market value, and little Clearfield ( CLFD ), with a $222 million market cap. The third- and fourth-largest among these small caps both carry 87 CRs: Finisar ( FNSR ) with $1.8 billion in market value, and Viavi Solutions ( VIAV ) with a $1.5 billion market cap. Finisar fell 2.9% Tuesday, and Viavi slipped 1.1%. Image provded by Shutterstock .