Why Fiber-Optic Networking Stocks Plunged in October

By Markets Fool.com

Image source: Getty Images.

Continue Reading Below

What happened

Shares of many fiber-optic networking stocks fell hard in October 2016, according to data from S&P Global Market Intelligence. For example, long-haul networking equipment makers Ciena (NYSE: CIEN) and Infinera (NASDAQ: INFN) fell 11.1% and 13.6% respectively. Optical components providers Oclaro (NASDAQ: OCLR) and Acacia Communications (NASDAQ: ACIA) dropped 14.5% and 32.5% lower. As you can see in the chart below, all of these stocks largely moved in tandem throughout the month.

So what

October started out on a positive note, as Acacia issued rosy preliminary results. Analysts checked out Ciena's mid-quarter business trends and came up with another sunny review. Another Wall Street firm started coverage of Oclaro with a buy rating, citing multiple long-lasting demand drivers for fast fiber networks. For a while, the sector was stuffed to the rafters with wine and roses.

But the market tenor took an abrupt downward turn near the end of October, when Infinera reported solid third-quarter results with a side of weak guidance for the fourth quarter. Infinera shares plunged lower 14% the next day, dragging the fiber-optic sector as a whole along for the ride. It wasn't all Infinera's fault, as China-based rival ZTE also issued soft next-period guidance the same day. In particular, Acacia's tremendous dip should be pinned more on ZTE's weakness than on Infinera's, because ZTE happens to be Acacia's largest customer.

Continue Reading Below

CIEN data by YCharts.

Now what

In a conference call with analysts, Infinera CEO Tom Fallon noted that end-market demand is "soft" in both Europe and North America. Large voice and data-network operators appear to have exhausted their capital expense budgets for their current fiscal years, leaving little room for a positive bounce at the end of 2016.

The same imbalance between short-term supply and demand should lead to similar weakness across the industry, which explains why so many fiber-optic networking stocks followed the same general trading path in October.

That being said, I see no reason to give up on the long-term promise of fiber networking. In fact, October's price drops may have uncovered some excellent buy-in opportunities.

Wireless networks stand on the very threshold of rolling out much faster 5G services over the next couple of years, which will require a beefy round of infrastructure upgrades behind the scenes. Everybody in this roundup, from equipment builders Ciena and Infinera to component suppliers Oclaro and Acacia, will see plenty of high-volume orders as this cycle rolls along.

So don't give up on any of these companies yet. All of them are worth at least a closer look right now.

A secret billion-dollar stock opportunity
The world's biggest tech company forgot to show you something, but a few Wall Street analysts and the Fool didn't miss a beat: There's a small company that's powering their brand-new gadgets and the coming revolution in technology. And we think its stock price has nearly unlimited room to run for early in-the-know investors! To be one of them, just click here.

Anders Bylund has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Infinera. Try any of our Foolish newsletter services free for 30 days.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.