Ian Wyatt is pitching a stock that he says is going to surge on the demand for more wireless data that comes with each new iteration of the iPhone or Samsung Galaxy… and I didn’t look at this ad for a few days, because it sounded really familiar.
Wyatt’s copywriters love the Apple iPhone connection — for years, every time there’s been a new iPhone announcement he’s had a new ad out touting a company that surges following those kinds of announcements… for the longest time, the pitch was always for Corning (GLW) from both Wyatt and from lots of other pundits who’ve touted “secret” Apple plays, because Corning makes the Gorilla Glass for the iPhone and iPad.
And for a little while Wyatt was pitching F5 Networks (FFIV) as a play on these “data hog” phones and the need to speed up wireless networks (and the web in general).
So I figured today’s ad was more of the same, probably another pitch for FFIV.
But nope, he’s got a new one this time — so let’s dig in and get you some answers. The intro, of course, entices and intrigues:
“On Tuesday September 9th, 2014, Tim Cook, Apple CEO, revealed all the details on its most advanced products ever… except for one.
“And this one ‘tiny’ detail could make you five times richer than Apple investors within the next twelve months.”
What is that “tiny detail?” More from the ad:
“… what Mr. Cook didn’t reveal to the hundreds of people gathered in Cupertino, CA…
“Or the millions, like me, watching on their computers…
“Absolutely every iPhone, every iPad… every new Apple Watch…
“Would be completely worthless…
“If it wasn’t for one particular company.
“It’s the ‘secret’ behind every iPhone… and just about every other Apple product on earth.
“A secret that few ever hear about…
“Yet, this one U.S. company is so vital to every aspect of Apple’s ‘Mobile Revolution’ …
“That every time Apple releases a new device… its stock soars.
“In fact, investors in this ‘secret’ company can regularly bank five times more money than Apple investors.”
OK, so that’s the intrigue that pulls you in — what’s the “tiny device?” Well, he says it has something to do with the iPhone (and the Samsung Galaxy) being a data hog, and with that “hogginess” getting worse with each new version as more data-intensive services and capabilities are added to the phones.
And he gives a few examples of the stock reacting during somewhat arbitrary time periods following iPhone launches — so AAPL rose 35% in the three months after the release of the iPhone 3GS, but this “secret” company stock went up 180%; in the eight months after the iPhone 4 AAPL went up 40% and this same “secret” stock went up 200%; for the iPhone 5, AAPL fell 25% in two months while the secret stock rose 43%.
Obviously, the fact that he’s throwing out somewhat random time periods reinforces that we don’t necessarily have a predictable or even correlated return between these things (iPhone releases and this company stock rising), even assuming that we were gullible enough to believe four episodes of some possible correlation were enough to give any kind of predictive power. But the charts are what catches a reader’s eye, and the big numbers that say “up 200%!” …
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… and for the last iPhone 5C/5S, the chart is even sillier — Wyatt shows us a chart with the “secret” company going up 90% in five months in 2013, from May to October, and implies that’s somehow connected to the iPhone that was released in September, near the end of that period. AAPL, for what it’s worth, was up about 25% during that time period. Perhaps that’s because this stock and Apple both moved up a bout the same in the three months following the iPhone release that year, both rising by about 15% In the last quarter of the year.
So yes, I know which stock he’s talking about now — I had forgotten, but he has pitched this stock before, using the same spiel about their patent portfolio that he gets to in the next part of the ad:
“It owns pipelines of data that run to iPhones and Samsung smartphones that allow them to use apps and access the Internet at lightning fast speeds from anywhere, anytime.
“If that sounds complicated… it is. No ordinary company could be tasked with such a vital role.
“This company manufactures crucial systems… including lasers, photodetectors, and integrated circuits… that make up the heart of our nation’s mobile networks.
“Like a heart pumping blood… these systems regulate the flow of data to the entire network….
“It currently owns 1,157 patents in the U.S. and overseas….”
So this is … Finisar (FNSR). And I guess he’s not bragging about their performance this year, because the stock has been moving down pretty steadily since he called it the “One stock you must own in 2014” for the “year mobile takes over” (FNSR Is down about 33%, AAPL is up about 40% since then).
So… sorry! Not actually a new one, just a poor memory from your friendly neighborhood Gumshoe. And, to be fair, I thought FNSR was looking pretty fairly valued and interesting back in March when Wyatt touted it, it was priced for growth at 19X earnings, but it had been growing nicely. Then, in subsequent quarters, they missed slightly and must have cut guidance pretty dramatically because analysts dropped their estimates for both this year and next by about 20%. So now, they’re halfway through reporting their fiscal year and they are expected to earn $1.12 on the year (ending in April) — that would be about 15% growth over the last twelve month’s earnings, which isn’t bad, and they’re trading at $16 (down from about $27 six months ago) so that means investors are currently paying 14X current year earnings.
But, of course, what investors are really looking at are those bad earnings numbers — like the 45% drop in earnings per share last quarter. They are a major optical systems vendor for telecom companies, but from their last quarter it sounds like the wireless stuff is actually hurting a little bit — my impression is that they make higher margins selling ethernet equipment, presumably into data centers and the like, than they do selling the wireless connection equipment, but that’s just my impression — you can read the transcript here and see the presentation here. They noted that they expect their revenue to decline again on soft demand from telecoms, but they think they have new products that will win more business and that LTE deployment will pick up again late in the year to increase demand, particularly in China.
So what does that mean? Well, this is what the Chairman, Jerry Rawls, said in the conference call:
“While we are disappointed with the near-term revenue outlook for our second quarter, we continue to believe in the long-term growth prospects of the company. Finisar’s revenue is driven primarily by growth in the worldwide demand for bandwidth from the ever increasing distribution and use of video, images and digital information.
“Another important trend that is benefiting us is the growth in Cloud services which drive networking hardware upgrades and the build out of a new hyper scale datacenters. These large datacenters need many more optical connections providing terrific opportunities for Finisar products.
“We believe Finisar is uniquely positioned with our broad product line, extensive customer engagement, profitable vertically integrated business model and strong balance sheet to capitalize on these market opportunities.”
They’ll probably report next in the first week of December, and the telecom supply sector has not necessarily been on fire of late… Infinera (INFN), JDS Uniphase (JDSU) and Ciena (CIEN) are most frequenty cited as peers for Finisar, and all of those are down for the year as of yesterday, though INFN did pop just today after a blowout quarter overnight and they’ve now gone positive on the year. Finisar is not sharing any near-term optimism at all, and the waves of spending by telecom companies are not necessarily smooth or predictable, so I’d guess that there’s no rush. You’ve probably got time to think this one through if you’re interested.
If you’ve got any experience with Finisar (I know many of you discussed it last time around), feel free to chime in and let us know with a comment below if you think they’re on the verge of turning things around (again), it’s been a volatile boom-and-bust stock for quite a long time, and the iPhone 6 isn’t going to determine their next quarter, but they do, at least, have a long-term revenue driver in increased bandwidth demand… whether they’ll earn that optical networking business at the expense of their competitors or not, I have no idea.
Disclosure: I do own shares of Apple (AAPL), I do not own stock in any other company mentioned above and won’t trade any of those named stocks for at least three days. My current individual equity positions are always listed here.