3 New Communications Equipment Firms Under Coverage
Though none of them have developed a moat, one does look undervalued at current prices.
We recently launched coverage of three communications equipment makers: Finisar (FNSR), Lumentum Holdings (LITE), and Viavi Solutions (VIAV). None have an economic moat, in our view. Finisar appears to be undervalued, trading 28% below our fair value estimate, while Lumentum is trading at a 16% premium and Viavi looks about fairly valued.
Finisar is the largest optical component maker with close to one third of industry sales, by our estimates, and second-place Lumentum holds domain expertise in optical communications components that face robust demand. However, these firms have not demonstrated an ability to earn excess returns on capital, thanks to customers’ sporadic purchasing patterns and a fragmented market structure. Although 3-D sensing in consumer electronics could provide a windfall in revenue, the laser diode business is quickly becoming crowded in anticipation of upcoming demand, and we don't think Finisar or Lumentum can carve out an economic moat here.
Alex Zhao does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.