NeoPhotonics Corp: Why This 5G Stock Could Double

NeoPhotonics Corp: Why This 5G Stock Could DoubleNeoPhotonics an Ideal 5G Play for the Bandwidth Explosion

With Chinese 5G player Huawei Technologies Co., Ltd. officially shut out of the U.S. and certain other western markets, this means tremendous opportunities for other 5G companies to develop. To play the expected tailwinds in 5G, a micro-cap with the potential to return strong gains is NeoPhotonics Corp (NYSE:NPTN).

The company develops light lasers and optoelectronic products that enable data to travel in high-speed communications networks. For NeoPhotonics, the move toward 5G networks will provide strong tailwinds for the company’s hardware.

But while the potential for the company is there, NPTN stock has failed to do much since 2011. NeoPhotonics stock fell to $4.03 during the March selling but rallied to a range high of $10.34 on June 8.

The break of $10.00 was encouraging, as this is a key resistance level for NPTN stock. NeoPhotonics failed to hold, however, and is again fighting support at $8.00.

Advertisement

Chart courtesy of StockCharts.com

So, while the chart is not ideal, NeoPhotonics stock could benefit from the 5G wave. The current price is attractive, given that the company is growing its revenues and adjusted earnings, and it is generating positive free cash flow (FCF).

Strong Fundamentals Imply Higher NPTN Stock Price

NeoPhotonics Corp’s revenues increased in four of the last five years, marking a five-year high in 2019.

Fiscal Year Revenues (Millions) Growth
2015 $339.4
2016 $411.4 21.2%
2017 $292.9 -28.8%
2018 $322.5 10.1%
2019 $356.8 10.6%

(Source: “NeoPhotonics Corp.” MarketWatch, last accessed July 17, 2020.)

The revenues in 2019 slightly fell short of the consensus forecast, but NeoPhotonics is estimated to ramp up its revenues by 11% to $396.0 million this year and by 7.7% to $426.4 million (and as high as $485.0 million) in 2021. (Source: “NeoPhotonics Corporation (NPTN),” Yahoo! Finance, last accessed July 16, 2020.)

NeoPhotonics delivered positive earnings before interest, taxes, depreciation, and amortization (EBITDA) in three of the last five years, making a strong comeback in 2019 after two years of negative EBITDA.

Fiscal Year EBITDA (Millions) Growth
2015 $28.3
2016 $27.5 -2.7%
2017 -$20.3 -173.8%
2018 -$4.0 80.4%
2019 $15.2 480.7%

(Source: MarketWatch, op. cit.)

NeoPhotonics has been reporting losses based on generally accepted accounting principles (GAAP), but the losses narrowed in 2018 and 2019.

Fiscal Year Diluted GAAP EPS Growth
2015 -$0.09
2016 $0.00 -105.4%
2017 -$1.23 -25,002%
2018 -$0.97 21.4%
2019 -$0.36 62.7%

(Source: MarketWatch, op. cit.)

On an adjusted basis, NeoPhotonics is profitable. The consensus estimate is for adjusted earnings of $0.52 per diluted share this year and $0.56 per diluted share in 2021. The high estimate for 2021 is $0.80 per diluted share. (Source: Yahoo! Finance, op. cit.)

Amazingly, NeoPhotonics generated positive FCF in four of the last five years, recording a five-year high in 2019. The move toward higher profitability will give a boost to the company’s FCF in the coming years.

Fiscal Year Free Cash Flow (Millions) Growth
2015 $9.3
2016 $2.1 -77.0%
2017 -80.2 -3,841%
2018 4.7 105.9%
2019 $25.2 432.0%

(Source: MarketWatch, op. cit.)

Analyst Take

NeoPhotonics Corp is small, but institutional investors like the company. About 179 institutions hold 85.2% of the outstanding shares. (Source: Yahoo! Finance, op. cit.)

Insiders have also been buying NeoPhotonics stock. Over the past six months, they bought a net 76,985 shares. (Source: Yahoo! Finance, op. cit.)

My bullish thesis for NPTN stock is based on the growth in the 5G space.

At its current price, NeoPhotonics stock trades at about 10 times its high EPS estimate for 2021, an attractive 1.1 times trailing sales, and about 2.5 times its book value. A doubling in price would not be out of place.