Instead, investors who hopped on the bandwagon were stuck with a stock that barely moved. So my hesitation with recommending the stock in July was based on fears that I was about to be fooled again. On the bright side, the company did grow revenue in this recent quarter by 9.3%, while earning 31 cents a share to meet Street expectations. Here again, however, for a stock that is trading at a price-to-earnings ratio of 83, which is more than 4 times that of rival Avago (AVGO), profits have to be better than meeting expectations to justify the premium.
When you consider that Avago posted a higher rate of sequential growth in the comparable quarter (15% vs. 9.3%), the valuation question for Finisar again comes into play. The good news for investors is that Finisar continues to build strong operating leverage. That non-GAAP gross margins expanded sequentially by 290 basis points serves as a perfect example.
What this tells me is that even in the face of stiff competition from the likes of JDS Uniphase (JDSU), Finisar management continues to make meaningful advancements in terms of customer loyalty. As the carrier spending environment continues to recover, keep an eye on to what lengths Finisar will go to preserve its strong margins. As evidenced by the better-than-expected guidance, the company appears poised to boost sales given its recent upgrade cycle.
For a company working hard to earn the Street's respect, Finisar's stock price and its high P/E suggests that it has the Street's attention. But the company is not out of the woods yet. As I've said, we've seen this pattern once or twice before. And with political wrangling in Washington, corporate budgets, on which this stock is trading, are anything but safe. I would tread cautiously here.At the time of publication, the author held no position in any of the stocks mentioned. Follow @saintssense This article was written by an independent contributor, separate from TheStreet's regular news coverage.
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