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Infinera and the Converged 100g Network Boom

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August 03, 2013 – Comments (0) | RELATED TICKERS: INFN , CIEN , ALU

 

Investors in Communications Equipment and Network Infrastructure companies are watching industry-wide spending, to judge demand for new equipment & services from companies like Alcatel-Lucent, Ciena, Infinera, Huawei, Cisco, JDSU, etc., and how each stands to benefit.

There are a few big trends happening: Network Convergence and 100G. Today's networks must deliver video, cloud data, and video games, instantly, in a cost effective way, to a lot of connected devices.  Ever heard the phrase, "The Internet of Everything" tossed around? Yes, in addition to the existing phones, tablets, and insatiable data consumption, we're now talking about adding any electronic object to the Network. Convergence and 100G - 1TB, help make this happen.

"Network convergence" refers to the technology and architecture that combines multiple services from separate networks, onto one.  Why is this needed? It's simpler to run, maintain & to fix, it's scalable, and more cost-effective. As reported in a recent July 31st article, converged infrastructure spend will hit $3.8 Billion by 2014.  It's going up.

100 Gig - 1 Terabyte and beyond means massive bandwidth.  Think of it as the ability to send unbelievably large amounts of data through a data pipe over really long distances, instantly.  Both of these trends are pretty obvious when you think how insatiable we are for data & content.

So, if you listened to Infinera's latest earnings call and you heard Tom Fallon, President & CEO say:

"Our continued improvement in performance is a reflection of strategic architectural decisions being made by new and existing customers to evolve to an Infinera Intelligent Transport Network, as networks begin to require converged super channel capability."

or, 

"Overall execution of our DTN-X strategy has gone well and reinforces our view that we made the right bets with our Intelligent Transport Network architecture and the DTN-X platform. Two market technology transitions, 100-gig and network convergence, have occurred simultaneously with the DTN-X launch, and the momentum created has been outstanding.

or, 

"I see that in all the same trajectories, video, wireless, cloud, all those are continuing to be extraordinarily robust. I see an absolute shift in the market to 100-gig, to 500-gig, to terabit and I see an absolute shift to the market to convergence. I don't know of anybody better positioned to take advantage and accelerate convergence or those trajectories than we are. So I feel very fortunate with where we are across the next several years."

...then you understand how Infinera is trying to position themselves. 

Since April 18th, we've seen Alcatel-Lucent shares rise 89%, Ciena go up 55%, and Infinera pop 77%. Just massive gains the last 3 1/2 months.  Savvy investors saw the spending shift and got in.  This is a rising tide lifting all boats situation.  Is there any upside left? Absolutely. It's just begun, and will continue for years. As corporate profits have exploded, with an economy broadly seen as recovering, Telco spending is back in a big way.

But Isn't Infinera Optimism Like Crying Wolf?

As an Infinera investor, the last 6 years certainly weighs heavily on you.  Your optimism has been shattered many times. Big things have always been just around the corner, and failed. There have been a few strong quarters here and there. But from a $19.71 IPO on June 7, 2007, to an all-time high of $27.05 just a week after going public, the shares have since plummeted and languished below $10 most of the time, hitting an all-time low of $4.35 as recently as Nov. 12, 2012, drastically underperforming the S&P over the same time period, and making Facebook's IPO look phenomenal.

So even if Infinera bulls try to demonstrate why this time, things are really different, I promise!, they'll simply be referred back to the last 10 times they said that.  Well, whether or not now is truly the time for Infinera, something has in fact happened that never happened over the last 6 years: 1) Infinera gambled on and built technology they thought would meet 2012's - 2020's needs.  They chose to leapfrog 40g and skate to where the puck would be, for today  2) Spending on converged super-channel networks has started, and is trending higher.

When you draw a comparison chart of Infinera, Ciena, and Alcatel-Lucent since INFN went public - without digging into the details, more or less, they look pretty similar.  This is about the cycle, for cyclical companies.  The new cycle has started, and it looks like it's time to get in.  

Ciena reports on August 26th, and should confirm the demand outlook.  Infinera beat Q2 top and bottom line estimates, beat on gross-margin, and costs, raised guidance for Q3, and projects a Q3 profit.  Alcatel-Lucent similarly beat on the top line, and matched EPS.  

 

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