MKM Out Bullish On NeoPhotonics, Cites Exposure To Optical Telecom, China

NeoPhotonics Corp NPTN recorded 10-percent revenue growth in 2018, with a gross margin expansion of 1,390 basis points between the first and fourth quarters of 2018. 

The company has high exposure to optical telecom and China — both of which are positive — and is levered to the industry’s strongest customers, according to MKM Partners.

The Analyst

Michael Genovese initiated coverage of NeoPhotonics with a Buy rating and $9 price target.

The Thesis

Despite the strong performance in 2018, NeoPhotonics stock has significantly underperformed the NASDAQ over the past three months, Genovese said in the Monday initiation note. (See his track record here.)

This is mainly due to investor concerns around the company’s high customer concentration, with Huawei accounting for 46 percent of 2018 sales and Ciena Corporation CIEN for 24 percent, the analyst said. 

Although six customers contributed more than 90 percent of 2018 revenues, this should not be a concern, as

NeoPhotonics has exposure to the industry’s strongest customers, and they've been sustainably gaining market share, Genovese said. 

The company’s telecom exposure is a positive, since this arena has far less competition and pricing pressure than datacom, he said. Its exposure to China is another positive, since Metro builds are strong in the country, and 5G backhaul builds will likely fuel demand for transmission gear from the back half of 2019, the analyst said. 

While there is investor concern related to a possible ban on Huawei purchasing U.S. components, this is unlikely to occur, Genovese said.

NeoPhotonics looks inexpensive, as the company’s products are good; its end markets are strong and sustainable; and management execution is improving, according to MKM. 

Price Action

NeoPhotonics shares were trading higher by 2.91 percent to $6.71 at the time of publication Tuesday. 

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