Can Finisar Pull Out of This Tailspin?

Finisar (NAS: FNSR) has seen better days. The optical networking specialist's shares have plunged nearly 15% over the last week and 42% from yearly highs set in February. The recent bloodbath was started by a bleak report from major Finisar customer Ciena (NAS: CIEN) , and Wednesday's first-quarter report from Finisar itself did nothing to calm nervous investors.

Sales fell 8% year over year to $220.5 million. Margins collapsed across the board, and non-GAAP earnings plunged 43% to $0.12 per share. These results missed analyst targets on both the top and bottom lines, and earnings guidance for the second quarter also fell below the Street view.

It's not a pretty picture in the long term:

Source: S&P Capital IQ.

Management pinned this quarter's soft results on macroeconomic woes in Europe and slowing economic growth in China. These large-scale issues put a damper on telecom and data network operators who really should be building out their next-generation networks right now.

Finisar pointed to modestly higher sales in the coming quarter as they started to pick up at the very end of this period. So maybe the telecoms of the world are getting back to brass tacks again, but it's not a massive trend by any means. As CEO Eitan Gertel put it on the earnings call: "I can't sit here and tell you that the whole telecom market has started to take products in a much higher level, but we see improvements on those products and a number of other products. And we're waiting for the market to take off."

The chart above paints a grim picture, but Finisar should be able to turn that frown upside down. I agree with Gertel's long-term vision, where Finisar should benefit from rising demand for high-speed networks. This is a market leader in a niche that was hot once and should get there again. Oclaro (NAS: OCLR) recently merged with Opnext just to stay competitive against Finisar and JDS Uniphase (NAS: JDSU) , and that's a classic sign of an industry shakeout. What doesn't kill you makes you stronger as the optical sector consolidates, and Finisar should be among the enduring survivors.

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