Finisar Receives $390 Million From Apple to Ramp Up 3-D Sensing Production; Maintaining $30 FVE

Apple announced on Dec. 13 that it has awarded $390 million to Finisar 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.