Why Shares of NeoPhotonics Crashed Today

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What happened

Shares of NeoPhotonics (NYSE: NPTN) lost more than 20% of their value on Thursday as the communications-equipment provider got caught up in the U.S. government's ongoing battle with Chinese telecom equipment giant Huawei Technologies. Huawei is an important customer of NeoPhotonics, and investors were in no mood to hang around to find out what the latest round of the trade war will mean for NeoPhotonics' sales.

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So what

On Wednesday, President Donald Trump signed an executive order allowing the U.S. to ban telecommunications gear from countries deemed "foreign adversaries." The order was aimed at Huawei, and as part of the move, the U.S. Commerce Department intends to add the Chinese company to a list of entities engaged in activities that are contrary to U.S. interests.

Once Huawei is on that list, the company would be restricted from buying equipment or licensing technology from U.S. companies. With Huawei representing 44% of NeoPhotonics sales in the fourth quarter, the government's actions could have dire ramifications for $333 million of NeoPhotonics' sales.

Now what

NeoPhotonics had already warned back in March that revenue and earnings could fall short of analyst expectations, but no one had factored in the possibility of sales falling off a cliff. NeoPhotonics' next four customers combined after Huawei represent 41% of total revenue, or just short of what Huawei contributes.

If there's one small shimmer of a bright spot for NeoPhotonics, company CEO Timothy S. Jenks said in March that Huawei's share of NeoPhotonics' revenue is reflective of Huawei's dominant position in the market. Assuming that's so, it's possible that a ban on Huawei gear would just shift demand to other vendors that are also NeoPhotonics customers, lessening the overall impact on the supplier.

There are a lot of "ifs" in that positive scenario. At least on Thursday, investors were more inclined to run for the exits than stay around and see how it all plays out.

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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.