Despite threats from telecommunication and data communication rivals like JDS Uniphase (JDSU) and Avago Technologies (AVGO) - Get Broadcom Inc. Report, Finisar's strong product portfolio has spurred widespread demand from, among others, AT&T (T) - Get AT&T Inc. Report, which relies on Finisar's components to build out its high-speed LTE networks.
Finisar's product differentiation continues to be a strong advantage, culminating in a March quarter that delivered year-over-year revenue and profit gains of 23.4% and 175%, respectively. Its shares closed Tuesday around $25, up 4.5% for the year to date.
Not only has Finisar gained meaningful market share, management has now shown -- on a consistent basis -- it can convert Finisar's product advantage into significant free cash flow. With that in mind, investors would be wise to get in on the action now before another company -- say, Cisco (CSCO) - Get Cisco Systems, Inc. Report -- decides to buy it.
With better-than-expected results coming out from Ciena (CIEN) - Get Ciena Corporation Report and Cisco, it looks as if carriers and telecoms are opening their wallets, which bodes well for Finisar's future.
On Thursday, the Street will be looking for 38 cents in earnings per share on revenue of $303.92 million, representing a year-over-year earnings and revenue increases of 90% and 25%, respectively. These are not typos. Very few companies within the optical equipment space have performed as well as Finisar in the past two quarters.
But it's not just about one quarterly performance. Finisar is poised for sustained outperformance for several more years. Analysts at RBC Capital have a $30 price target on the stock while projecting 25% annual earnings increase over the next five years.
More than anything, Finisar's future earnings potential is one of the reasons why the company is rumored to be a Cisco acquisition target.
In February, Barron's ran a story suggesting Cisco was considering picking off Finisar for $27 to $28 per share. Finisar stock peaked at $28.85 on April 24. With no new developments surrounding an acquisition, the stock has given back more than 14% of those gains.
The way I see it, this recent decline only makes Finisar valuation more appealing. Until something happens I expect the speculation will continue. Finisar would make a nice complement to Cisco's routing and switching capabilities -- and Cisco can definitely use the top-line growth.
With shares down 14% from their 52-week high and 21% below RBC's $30 price target, the longer Cisco waits the more expensive Finisar will get.
It's not just Cisco that's risking a higher price by procrastinating. Would-be investors waiting on the sidelines for a better entry point will lose out on one of the best growth stories on the market today.
At the time of publication, the author held no position in any of the companies mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.
>>Read more: Cramer: Playing the Ultimate Rumor Stock