4 Reasons To Be Bullish On Oclaro Shares

Oclaro, Inc. OCLR is an optical component maker headquartered in San Jose, California. In a note released on July 7, Stifel raised the price target on the shares of the company from $10 to $12. Analysts led by Patrick Newton gave four reasons for their more bullish stance.

1. Modeling Weakness In China

The analysts believe China is de-risked from consensus estimates, clarifying that their 2018 revenue estimate of $639 million, representing 6.4-percent growth over the 2017 estimate of $600.6 million, does not model any recovery in China.

However, the analysts believe these estimates could prove conservative if Chinese metro tenders roll out in the next four quarters. However, the analysts expect the contributions from 100 G metro rollout, continued strength in CFP2-ACO sales and a ramp in QSFP28 transceivers to serve as offsetting factors.

The CFP2-ACO is the 100Gb/s coherent CFP2 pluggable transceiver, enabled by Oclaro's leading InP technology. It represents the next generation of high-performance optical modules designed for a variety of DWDM lineside applications. It vests the advantage of reduced power dissipation and increased density, with the added benefit of pluggability for reduced first installed cost.

2. Reaping First-Market Advantage From CFP3-ACO

Stifel sees growth in DCI systems and metro to be key drivers of module densification, which would benefit Oclaro and its CFP2-ACO module. The firm referred to industry estimate of 2.5 times growth in the pluggable-ACO market share within the overall coherent module market.

The firm sees the company benefitting from the first-to-market advantages, given Oclaro being the first supplier of CFP2-ACO, which is interoperable with eight DSP vendors and having best-in-class specifications.

3. Datacom Demand Pushing QSFP28 Transceiver Sales

While noting that Oclaro has invested heavily in developing CWDM4 and LR4 variants of the QSFP28 transceiver, having to reach up to two and 10 Km, respectively, Stifel said it believes they will be less at risk of commoditization, given the more complex lasers and module packaging required.

The firm indicated that industry estimate for QSFP28 LR4 and CWDM4 market stand at $350 million in calendar year 2017, growing at a 35 percent CAGR between calendar year 2016 and 2020.

"We estimate that QSFP28 related revenues could reach $130 million for Oclaro in FY18 (June)," the firm said, reasoning that Datacom demand will drive increased sales.

4. Potential M&A Target

Stifel sees Oclaro as potential buyout target for large component vendors such as Finisar Corporation FNSR and Lumentum Holdings Inc LITE.

Concluding, the firm said it remains Buy rated on Oclaro, given its belief that the 100G growth outside of China will remain strong in 2017, elevated level of gross margins, the potential for revenue upside and multiple expansion, if China demand accelerates.

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