Piper Jaffray Downgrades Finisar; Apple Suppliers Down On iPhone X Production Concerns

Finisar Corporation FNSR, a manufacturer of optical communication components and subsytems, has historically performed poorly during periods of margin compression, a Piper Jaffray analyst said in a Monday downgrade note. 

In reaction to the downgrade — and a Nikkei Asian Review report that said Apple Inc. AAPL might slash iPhone X production by 50 percent to 20 million units for the March quarter — shares of Finisar and other Apple suppliers were down Monday.

The 20-million iPhone figure is a scale back from the 40 million units targeted at the time of the iPhone X launch in November. The poor uptake of the newest iPhone during the holiday season in key markets such as Europe, the U.S. and China was cited as the reason for the move in the Nikkei report. 

The report also said the high cost of the iPhone X is a deterrent, with the premium pricing primarily attributed to the price of the phone's OLED display. Apple might not immediately transition its other models to OLED displays, while it may also deter other OEMs from shifting from LCD to OLED screens, the storys said. 

The Analyst

Piper Jaffray analyst Troy Jensen downgraded shares of Finisar from Overweight to Neutral and reduced the price target from $28 to $20.

The Thesis

Demand trends for Finisar are likely to remain challenged for the next several quarters, analyst Jensen said. The analyst is also concerned about China's intention to source more optical components domestically, which he said will impact North American companies across the optical group.

"We believe Finisar has historically generated on average 15-20 percent of quarterly sales from Chinese customers," Jensen said.

Jensen said his assumptions as well as the consensus margin expectations could prove overly optimistic, given the expectation that Finisar is likely to experience margin erosion over the next few quarters. History points to a tough time ahead for the stock, which has performed poorly during periods of operating margin compression, the analyst said.

Citing concerns over supply chain cuts for iPhone X, Piper Jaffray said it now appears unlikely that its assumption of VCSEL sales growth for 3-D sensing applications to the benefit of revenue and gross margins for the April quarter will materialize. 

Piper Jaffray reduced its third-quarter revenue estimates by $5 million to $330 million. This compares to Finisar's guidance of $325 million to $345 million. Piper also trimmed its 2018 earnings per share estimate from $1.12 to $1.05, which is below the consensus estimate of $1.12.

The Price Action

Finisar shares are down about 37 percent over the past year.

At the time of writing, the shares were slipping 1.94 percent to $18.70. 

Apple was trading down 2.05 percent at $168.

Among other component suppliers:

• Qorvo Inc QRVO was trading down 0.04 percent at $67.91. 
• Broadcom Ltd AVGO shares were declining 2.68 percent at $244.07. 
• Skyworks Solutions Inc SWKS stock was slipping 0.67 percent to $96.70. 

Related Links:

5 Reasons Finisar Is An Analyst's Top Pick For 2018

Optical Stocks In Focus Following Apple's Deal With Finisar

Photo courtesy of Apple.