You may not realize it, but fiber optic networks power our world. And with the advent of 5G, the industry will only increase in importance. In the market, fiber optic stocks are making steady gains, a trend that will continue as we see 5G deployments increase worldwide.
These companies will play a critical role in the 5G revolution by setting up modern mobile telecommunication systems.
That’s why the Vanguard Communications Services ETF (NYSEARCA:VOX) is up almost 50% since March lows.
The bottom line here is that the industry is one of the safest at the moment, and you can rest easy putting your money into it. So, without further ado, here are three hot fiber optic stocks that will power your portfolio to new heights.
Fiber Optic Stocks: Lumentum Holdings (LITE)
California-based Lumentum manufactures optical and photonic products that are used by optical networking and commercial customers. One of the brightest lights in the sector, Lumentum, benefits from able management, and strong fundamentals. Its recent quarterly results confirmed that the business remains novel coronavirus proof, despite supply chain issues arising due to the virus.
Revenue came in at $368.1 million, beating consensus estimates by $18 million. Net income is positive for the quarter and trailing nine months. Shares gained 5% pre-market after the Q4 beats on EPS and margins. However, supply chain issues buffeted the company during the quarter. But that’s an expected issue since we are in the middle of a pandemic. Many countries implemented restrictions on the free movement of goods. That affected Lumentum’s logistics, especially in countries like Malaysia.
With all that said, let’s discuss valuation a bit before wrapping up. With LITE stock trading at 53.14x trailing 12 months price to earnings, shares are hardly available at a discount. It’s arguable that the stock is in the overbought category. That’s not to say I am not bullish on its future. It’s just that I would wait for shares to drop 10% to 15% before buying in.
Ciena is one of the world’s biggest players in advanced optical networking. A backbone of 5G networks, the Maryland-based telecommunications company will continue to benefit as demand for fiber optic increases as 5G deployments surge worldwide.
The recent quarterly results paint a rosy picture, justifying the premium valuation CIEN stock enjoys. Revenue grew at 3.4% year-over-year, while the gross profit margin increased to 46.9% from 43.9%. Adjusted EPS surged to $0.76 from $0.48% last year, beating the consensus estimate of $0.52 by a fair margin.
Covid-19 also led to a decrease in operating expenses due to reduced traveling costs. All in all, the quarter was excellent for Ciena, but management was quick to highlight that top-line growth will be stressed during 2020 owing to the virus. That should come as no surprise as access to new sites and lab certifications remain severely affected during this crisis.
Like others on this list, CIEN stock is not cheap by any means. Shares are trading at a P/E of 23.56 times, a minor discount to the sector median. However, considering the other players involved in the sector, such as Nokia (NYSE:NOK), Juniper (NYSE:JNPR), Cisco (NASDAQ:CSCO), and Motorola (NYSE:MSI), CIEN stock starts to seem reasonably valued.
Considering the company’s track record, we can hope that it continues to execute its strategies as the demand for bandwidth increases. There will likely be some correction later in the year, but even if you add more to your portfolio right now, you won’t be disappointed.
II-VI is a vertically integrated company that manufactures engineered materials, optoelectronic components, and optical systems. One of the best fiber optic stocks, IIVI defied expectations and delivered robust top-line growth in the third quarter amid challenging conditions.
Apart from the stellar returns this quarter, guidance is also healthy for Q4 ’20. IIVI is forecasting revenue between $650 million and 700 million and non-GAAP EPS between $0.50 per share and 0.70 per share in the forthcoming quarter. That’s quite positive, considering the company could face supply chain issues, shutdowns, and other Covid-19 related issues later in the year. Perhaps the confidence has to do with its robust liquidity position, with $388 million cash at quarter-end, and an additional $358 million available through a revolving facility.
This crisis has made people realize the importance of 5G and how critical it will be in our daily lives. Although there will be softness in the recovery period, the long term growth story for optical is intact, and that’s why II-VI is bullish on its prospects.
With so much going right for the company, it comes at a pleasant surprise that from a valuation perspective, shares remain somewhat attractively priced. Operating with a PEG of 1.41, IIVI stock seems overvalued. However, the sector median is 2.30, just to put things in perspective. Shares certainly have positive momentum built into them, but they still have some upside.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio. Faizan Farooque does not directly own the securities mentioned above.