Infinera Stock Offers Investors Something Different Than Cisco Stock

Like bigger compatriot Cisco , networking provider Infinera can't seem to catch a break from investors. Of course, with such widespread selling of late, Infinera and Cisco shareholders are hardly the only folks left scratching their heads. In Infinera's case, despite its nearly 2% stock price jump as of midday Tuesday, it is still well off levels achieved shortly after announcing a strong second quarter on July 22 and this could be good news for those looking to buy shares.

There is some negativity from analysts who have recently downgraded Infinera, but it seems for every pundit expecting the worst, there are two that recognize it offers great value for mid-cap growth investors. At about $2.7 billion in market cap, Infinera is dwarfed by the likes of Cisco, but that can -- and likely will in this case -- work in its favor. It takes a lot less to the move the needle for a mid-cap up-and-comer than a behemoth like Cisco with $130 billion in market capitalization.

What's not to love?The day Infinera announced second-quarter earnings, its shares ended the day at $21.29. By the close of trading the following day, July 23, Infinera's stock price had jumped nearly 9% to $23.15, and it steadily climbed from there to nearly $25 in mid-August. And why not? There was a lot for investors to cheer after announcing a Q2 in which most every financial measure of note had markedly improved.

On the revenue front, Infinera's $207.3 million was a 25% improvement compared to 2014. And despite increased overhead, primarily research and development costs, income from operations more than doubled, to $16.53 million from just $8 million a year ago. On a GAAP basis (including one-time items), gross margins also popped from 42.5% to nearly 47%.

The same strong results applied to Infinera's net income in Q2. Factoring in one-time costs, earnings per share (EPS) totaled $0.13 in Q2, more than three times 2014's $0.04. As sound as Infinera's EPS was last quarter, what made it really stand out were the additional 14 million shares outstanding -- give or take -- this year, equal to 11% more than 2014.

Cisco has seen this movieLike Infinera, Cisco shareholders enjoyed an initial run-up from that company's pre-earnings release price of $27.90 on Aug. 12. The following day, Cisco shares steadily increased and nearly touched $30 a share before the rug was pulled out from under it. And Cisco's nice little run came despite muted growth relative to Infinera. However, as mentioned earlier, it takes a lot less for Infinera to make a positive dent on the top and bottom lines than for Cisco.

That said, Cisco revenue grew nearly 4% over last year to $12.84 billion, and EPS improved by 4.7% a share to $0.45. After removing one-time items, EPS jumped over 7% to $0.59. Now toss in Cisco's financial results in its recently completed fiscal 2015 Q4, which also beat analyst estimates, and it stands to reason that investors were buying in.

Where to from here?For the more risk-averse investor, Cisco's size and slow but steady growth -- along with its 3.25% dividend yield -- is an attractive alternative. But for those in search of a more aggressive, long-term growth opportunity, Infinera warrants a hard look.

It's worth noting that the average analyst price target of Infinera is $27.13 a share: 30% above current levels. And eight of the 10 folks that follow Infinera have either a "buy" or an "outperform" rating. Analyst views in and of themselves are no reason to buy any stock, of course, but when combined with Infinera's strong financial results and expectations for continued growth, it's awfully intriguing.

Infinera naysayers may point to the fact that its price is a whopping 65 times trailing earnings (P/E), but a look ahead tells a different story. Infinera's forward P/E is just 21, meaning expectations are for several strong quarters ahead. And based on its recent performance, there's no reason to think Infinera won't deliver.

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Tim Brugger has no position in any stocks mentioned. The Motley Fool owns and recommends Infinera. The Motley Fool recommends Cisco Systems. 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.

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