Shares of optical equipment provider Infinera (NASDAQ: INFN) plunged as much as 18% in early-morning trading on Monday. Shares were down about 14% as of 10:20 a.m. EDT. An analyst downgrade appears to be the primary reason for the big downward move.
Michael Genovese, an analyst at MKM Research, downgraded Infinera's stock to "sell" today. Genovese made the move in response to a channel check that showed that Infinera's competitor Ciena (NYSE: CIEN) is close to stealing away CenturyLink (NYSE: CTL) as a customer.
If Genovese's channel check proves to be correct, then Infinera has a serious problem on its hands. CenturyLink is one of Infinera's largest customers, especially after it acquired Level 3 Communications last year. In total, CenturyLink and Level 3 Communications accounted for 18% of Infinera's total revenue in 2017. Losing them as a customer would certainly have an outsized impact on the company's financial statements.
Given the analyst downgrade and news of a potential customer defection, it isn't hard to figure out why shares are being slammed today.
Today's move helps to showcase just how risky it can be to invest in companies that have serious customer concentration issues. If CenturyLink does end up switching to Ciena -- which hasn't been confirmed -- then Infinera's management team will likely have to cut its full-year guidance. This is a big reason I include customer concentration as a major red flag on my detailed investment checklist.
As a reminder, Infinera is currently attempting to close a deal to acquire industry peer Coriant for $430 million. A major reason given for why this deal makes sense was that it would reduce customer concentration. That logic makes all the sense in the world today given the update from Genovese's channel check.
10 stocks we like better than InfineraWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*
David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Infinera wasn't one of them! That's right -- they think these 10 stocks are even better buys.
Click here to learn about these picks!
*Stock Advisor returns as of August 6, 2018