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Stock Analyst Update

Finisar Still Undervalued After Apple Deal

We are maintaining our fair value estimate for the no-moat firm.

Mentioned:

Apple announced on Dec. 13 that it has awarded $390 million to  Finisar (FNSR) to build out capacity and ramp up production of vertical-cavity surface-emitting lasers, VCSELs, used in Apple's 3-D sensing applications like FaceID. Finisar will use the money, which comes from Apple's $1 billion Advanced Manufacturing fund, to develop its recently purchased 700,000-square-foot facility in Sherman, Texas, to produce VCSELs using 6-inch wafers as early as the second half of 2018. This confirms our most important growth thesis on Finisar, as we have been expecting it to expand its 3-D sensing market share in the long run from this fast-growing vertical. We are maintaining our no-moat rating and $30 fair value estimate for Finisar, as our valuation estimates have already assumed material top-line contribution from 3-D sensing. We still consider the stock undervalued after a 28% rally in early-market trading. We are also maintaining our $55 fair value estimate and no-moat rating for Lumentum, which is down 11% today, as our valuation assumptions have already considered that Lumentum would not emerge as the dominant VCSEL provider to Apple or the rest of the industry.

Apple’s investment will create about 500 jobs at the Sherman facility, and all of the VCSELs Apple purchases from Finisar will be produced in either the Sherman facility or Finisar’s existing 4-inch wafer facility in Allen, Texas. Finisar is likely to run a quarterly production run rate of $130 million over the next few quarters, with $100 million run rate at Sherman and a $30 million maximum run rate at Allen. We have long suspected that Finisar is more likely to gain market share, as Apple encourages more suppliers to the space to compete with the de facto supplier, Lumentum. Apple noted that in the fourth quarter of 2017, it will purchase 10 times more VCSELs than were previously manufactured around the globe over a similar period. 

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Alex Zhao does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.