2 Reasons Goldman Downgraded Finisar

Finisar Corporation FNSR's 2017 performance has been highlighted by multiple delays in product ramps, including VCSELs for 3D sensing that's being included in Apple Inc. AAPL's iPhone.

The Analyst

Goldman Sachs' Doug Clark.

The Rating

Clark downgraded Finisar's stock from Buy to Neutral with a price target lowered from $27 to $22.

The Thesis

Finisar was issued a Buy rating by Clark back in October of 2016, but since then the stock has fallen 37 percent. That's worse than a 20-percent decline in its Optical peers and notably short of the 20-percent gain in the Russell 2,000 index. The analyst's bullish thesis was based on expectations for ongoing strength in China but now growth rates are expected to be lower than 2016's peak levels, a smoother production ramp in 2017, and the company's vertical integration offered margin upside but now the end markets have "softened."

The analyst added two reasons to justify moving to the sidelines:

• Hyper scale data center demand trends over the past few weeks showed signs of notable weakness.
• Component production capacity is accelerating at a fast rate at a time when end markets are softening which creates pricing and margin pressures.

On the other hand, Finisar does boast optionality from M&A which would generate meaningful cost synergies.

Price Action

Shares of Finisar were trading lower by more than 2.5 percent Tuesday morning.

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