Unpacking Infinera's Performance And Prospects: Is It Time To Buy?
Oct. 03, 2023 6:50 AM ET Infinera Corporation (INFN)
Edgar Torres H
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Summary- Infinera is a significant player in modern communication technology, providing advanced networking solutions to a diverse clientele.
- The company's strategic positioning, innovative products, and financial resilience make it an undervalued investment opportunity with potential for future growth.
- Despite financial recalibrations in 1H2023, INFN has consistently grown, with revenues growing at a 12.5% CAGR since 2013 and improving EBIT margins.
- My valuation model suggests that INFN stock is modestly undervalued, presenting a potential upside of 14.7%, leading to a "buy" rating.
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Infinera Corporation (NASDAQ: INFN) has established itself as a significant player in modern communication technology, providing advanced networking solutions to diverse clients. Its strategic positioning and innovative product offerings have led to a steady revenue growth of 12.50% CAGR since 2013 and a commendable enhancement in EBIT margins. I believe INFN's ability to maintain its market presence despite financial challenges speaks volumes about its competitive strength. When considering its valuation, I think INFN seems to be undervalued. This assessment, combined with its qualitative attributes and promising business outlook, leads me to rate INFN a "buy" at its current price levels.
Business OverviewInfinera Corporation's positioning as a global networking solutions provider places it at a significant nexus of modern communication technology trends. The wide range of its clientele, from telecom service providers to government entities, reflects a broader shift towards data-heavy applications facilitated by high-speed internet, 4G/5G mobile broadband, and the Internet of Things (IoT). In this regard, INFN’s solutions play a crucial role in aiding clients to expand their networks to manage the rising bandwidth demand, which has been growing at a rate of 30% or more year over year, signifying a strong alignment with market trends.
 TradingView.
INFN's product portfolio includes hardware and software for transport infrastructure across metro, long-haul, subsea, and Data Center Interconnect segments. Hardware offerings comprise compact modular platforms, packet-optical platforms, optical line systems, and optical subsystems. On the software side, INFN’s Transcend Software Suite provides automation and network management capabilities. Notable products include the INFN’s Cloud Xpress Family for large-scale data center operators and the ICE-XR Coherent Pluggable Optics for diverse transport applications. Additionally, INFN offers comprehensive professional support and training services covering all phases of network ownership.
The introduction of a new suite of coherent optical pluggables in 2021 marks an astute recognition of evolving market needs, particularly for point-to-point and point-to-multipoint solutions. This innovation can be seen as a forward-looking initiative to corner a burgeoning market segment. It also reflects a continual evolution to stay ahead of market demands, a characteristic that, in my opinion, is indispensable in the fast-evolving tech landscape.
 Earnings Call Slides
The hallmark of INFN’s product line, the Infinite Capacity Engine technology, embodies a concerted effort to simplify network management and operational automation. This is particularly resonant in a digital ecosystem where efficiency and ease of operation are as prized as raw performance.
The firm's unique selling proposition, vertically integrated optical engine technology, is a significant competitive advantage. This integration means the firm controls multiple stages of producing and distributing its optical engine technology, unlike other companies that might rely on external parties. This control can lead to cost savings, better quality assurance, and a more streamlined process from development to delivery, thereby providing a notable edge over competitors in the market.
INFN’s strategic move to expand through internal growth and tactical acquisitions like that of Telecom Holding Parent LLC showcases a balanced approach to scaling. This acquisition seems to have been a key move that boosted INFN's position to a higher level of market leadership in the optical networking solutions sector.
INFN is well-positioned in the digitalization-driven market thanks to its strategic growth, innovative products, and focus on easing client operations, marking its stance in the networking solutions sector. The firm's adaptive trajectory to market dynamics is notable. However, I believe its future success in overcoming dependency on a few customers for significant revenue and the absence of long-term sales commitments hinges on its ongoing innovation and response to market shifts, which is crucial in a tech-advancing market.
 Earnings Call Slides
Financial Resilience Amid GrowthIn 1H2023, INFN underwent financial recalibration. Its total assets shrank from $1.67 billion to $1.59 billion. While this dip might initially seem concerning, it's crucial to contextualize it against INFN's steady growth since 2013. The accounts receivable dropped from $419.74 million to $325.65 million. I believe this may be due to revised sales tactics or better collection methods, underscoring the company's commitment to operational prowess. Additionally, accounts payable decreased modestly from $304.88 million to $279.64 million, reflecting INFN’s emphasis on collecting efficiency.
Furthermore, during the first half of 2023, INFN reported a net loss of $28.67 million. However, when considering this figure, it's essential to contextualize it within the company's historical growth pattern and strategic adaptability. For comparison, the net loss in 1H2022 was $97.57 million, indicating a significant improvement. In my view, the company's dedication to refining its operational strategies and emphasizing financial stewardship is commendable. I believe this not only highlights INFN's resilience but also suggests that the company is well-equipped to handle potential financial challenges ahead.
Valuation AnalysisNevertheless, taking a step back and looking at the long-term, INFN has showcased a consistent growth pattern, with its revenues growing at a 12.5% CAGR since 2013. This steady growth indicates the company's ability to maintain revenue momentum and create value in a competitive market. I believe a significant driver behind this growth has been INFN's strategic focus on expanding its Metro footprint and forging partnerships with major service providers. Their entry into emerging markets, especially India, is a testament to their forward-thinking approach. Their strategic decisions, particularly in market expansion, position them well for future growth opportunities.
INFN's EBIT margins have notably improved since 2017, transitioning from -19.9% to just -0.2%. This progression suggests that INFN is nearing profitability in EBIT terms. Achieving profitability would cement INFN's potential as a long-term free cash flow generator, a critical metric for assessing a company's financial health. Their recent accomplishment of expanding operating margins by 240 basis points year-over-year in the second quarter underscores this potential. I believe that the launch of the Subsystems business and INFN's advocacy for open architectures, particularly their involvement in the Open XR Forum, have significantly contributed to this margin growth. The remarkable expansion of their operating margins by over 1000 basis points from 2018 to 2022 indicates their dedication to operational efficiency. INFN’s vertical integration strategy into the Metro portfolio has been wise, positioning them well for future financial stability.
INFN's strength in the face of challenges, such as supply chain disruptions and the global pandemic, underscores the strength of its business model. In my view, this resilience, combined with their consistent financial performance, suggests a forward-thinking strategy. Their unwavering commitment to these strategies will likely position them favorably in the market in the future. The company's ability to maintain growth and profitability amidst external adversities is commendable and, in my opinion, is a testament to its strategic agility and adaptability.
 Author's elaboration.
Given INFN’s context, I've constructed my valuation model leaning on the side of caution, but I anticipate a brighter outlook in the upcoming years. Specifically, I forecast that INFN's revenue will slow down until 2027. At that juncture, I use INFN's figures as the terminal value in my DCF analysis. I think it's logical to expect a continued enhancement in EBIT margins, especially considering the consistent uptrend since 2017. I believe this is a strong indicator of the company's financial health and potential for future profitability. Additionally, I've relied on the company's historical data for D&A, CAPEX, and NOWC, expressing them as a percentage of total revenues. To finalize my model, I discount the projected FCFs for INFN using an implied CAPM discount rate of 11.6% through the FCFF DCF method.
 Author's elaboration.
In my analysis, the valuation model indicates that the company may be modestly undervalued, showing a potential upside of 14.7% from its current position. Notably, INFN has demonstrated steady revenue growth and improved its EBIT margin since 2019. These financial figures underscore the company's stability and potential as an investment opportunity. I believe that INFN presents a compelling buy opportunity at its current levels, with an inferred fair value of $4.80 million per share, primarily due to its consistent financial performance. Hence, I rate INFN a “buy.”
ConclusionINFN's presence in the networking solutions sector reflects its innovation, strategic expansion, and adaptability. The company has demonstrated consistent revenue growth and enhancements in EBIT margins, suggesting its viability as a long-term investment. In my view, INFN's ability to remain resilient, especially during global adversities, speaks volumes about the robustness of its business model. This resilience is a compelling reason to believe in the company's prospects. Furthermore, with its focus on market expansion and operational efficiency, INFN seems well-positioned for sustained growth. Based on my valuation model and drawing from the company's past performance, I believe INFN might be slightly undervalued, indicating a potential upside of 14.70% at its current valuation. Given INFN’s steady financial track record and promising future, I believe INFN deserves a "buy" recommendation at its present price. |
