What happened
Shares of optical transceiver stock Infinera(NASDAQ: INFN) were climbing in Thursday trading, up 12.7% on the day.
The company reported earnings last night, and while the initial reaction after hours was negative, it appears investors took a more optimistic take on the release and commentary today. Also, given that a high percentage of Infinera's shares were sold short heading into the release, there may be some short covering going on as things turned out not as bad as feared.
So what
In the second quarter, Infinera grew revenue 5.1% year over year to $376.2 million, with non-GAAP (adjusted) earnings per share near breakeven. Both figures slightly beat analyst estimates. Looking ahead, the company guided toward roughly flat results quarter-over-quarter for the September period.
It was by no means a great report, but given how low expectations were for Infinera, the stock is spiking today. Infinera's stock has struggled in recent years as it has not been able to parlay its modest revenue growth into sustainable profits. The optical transceiver market has been competitive and highly cyclical, with telecom operators under pressure and therefore making inconsistent capital investments.
Still, the slight beat and better-than-feared outlook may be spurring short-sellers to cover today. As of July 31, about 18.5% of shares outstanding and over 25% of the public float were sold short, leading to today's short-covering pop.
In addition, CEO David Heard repeated his goal for the company to continue increasing profitability and earn "at least" $1 per share in earnings either in 2025 or 2026. That would certainly make things interesting, as Infinera only trades a little over $4 per share today, even after the day's pop.
Now what
Earnings of $1 would make the stock incredibly cheap today for sure, but there are some caveats. One, Infinera does have a notable debt load of $683 million against $165 million in cash. So on an enterprise value basis, it's not quite as cheap. Second, Infinera has never generated anywhere close to that amount of profits in its corporate life, with most of its results having been negative in terms of both earnings and cash flow. So, investors are understandably skeptical.
Still, for risk-on investors, you may wish to think about investigating Infinera's new strategy to get to that level of profitability. If you think the plan sounds reasonable, there's a case that Infinera could make for an interesting contrarian pick. Still, its performance in terms of growth versus other competitors has been lacking in recent years, so there's also a good chance the stock may continue to disappoint.
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Billy Duberstein has no position in any of the stocks mentioned. His clients may own shares of the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
