Huawei is now de-risked and demand from non-Huawei customers remains strong, which should diversify NeoPhotonics Corp’s NPTN customer base and improve its quality of earnings, according to B. Riley.
The NeoPhotonics Analyst: Dave Kang upgraded NeoPhotonics from Neutral to Buy, maintaining the price target at $9.
The NeoPhotonics Thesis: Despite the U.S. Department of Commerce’s restrictions on Huawei, which contributed 52% of NeoPhotonics’ sales in the second quarter, the company had reaffirmed its third-quarter outlook at sales of $97-$105 million and earnings of 3-13 cents per share, Kang said in the note.
The company is witnessing strong demand from non-Huawei customers, with rapid adoption of its 64 Gbaud products for 400G, 600G and 800G. The analyst expects the contribution from 400G and above to grow from 20% of sales in the third quarter to more than 30% of sales in the fourth quarter, as revenues decline due to “possible cessation of the Huawei business.”
Management expects NeoPhotonics to become profitable by the end of 2021, implying losses till then.
NeoPhotonics is “no longer at the mercy of Huawei, whose demand has been known to be volatile,” while a significant portion of the company’s Huawei business could be replaced in the next three to four quarters, Mg believes.
NPTN Price Action: Shares of NeoPhotonics were trading higher by 4.6% at $6.97 at the time of publication Tuesday.
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