Why Shares of NeoPhotonics Are Soaring on Monday

What happened

Shares of NeoPhotonics (NYSE:NPTN) are up more than 10% on Monday after the telecom equipment company received an analyst upgrade. After two days of declines that cost the company nearly half of its market value, B. Riley FBR has called a bottom.

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So what

NeoPhotonics was in a free fall last week following a decision by the U.S. government to designate Chinese telecom equipment giant Huawei Technologies as a company engaged in activities that are contrary to U.S. interests. The designation restricts Huawei from buying equipment or licensing technology from U.S. companies.

Given that Huawei accounted for about 44% of NeoPhotonics' sales in the most recent quarter, the move could be devastating to the supplier's outlook. The decision led to at least two downgrades of NeoPhotonics shares due to uncertainty about how the company will proceed.

B. Riley FBR analyst David Kang said "enough" on Monday, upgrading the stock to a buy from neutral while lowering his price target to $5.50 from $7.25. NeoPhotonics' Huawei exposure has been "derisked" following the sell-off, Kang says in a research note.

Now what

Even after Monday's jump, NeoPhotonics shares are still down 26% since May 15. The company has noted in the past that Huawei's huge share of NeoPhotonics' revenue is reflective of Huawei's dominant position in the market and that NeoPhotonics does business with Huawei's competitors as well. But it remains to be seen if a Huawei ban shifts demand to other vendors, especially outside of the U.S.

Kang in his upgrade is saying after last week's fall, there isn't much downside, but in lowering his price target, he is admitting NeoPhotonics faces an uphill battle for as long as the Chinese/U.S. trade war persists. Investors should trade carefully.

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Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.