EXFO Inc: Unjustly Ignored 5G Stock Up 100% Since March on Solid Q3 Results

EXFO Inc: Unjustly Ignored 5G Stock Up 100% Since March on Solid Q3 ResultsEXFO Inc Continues to Thrive in COVID-19 Environment

EXFO Inc (NASDAQ:EXFO) is an overlooked 5G stock that has been outperforming the broader market since the coronavirus pandemic sent stocks spiraling in March. EXFO stock has been thriving since then, hitting an intra-day high of $4.19 on July 21, for a four-month gain of about 100%.

Why? EXFO’s products and services are vital for 5G. EXFO is also an excellent company for the COVID-19 environment, which includes the need for touchless, contactless operations.

This helped the company report strong third-quarter results and provide a solid outlook, with management saying its earnings will continue to “improve as long-term drivers like fiber and 5G deployments remain intact.” (Source: “EXFO reports third quarter results for fiscal 2020,” EXFO Inc, July 8, 2020.)

And we all know 5G isn’t going anywhere; it’s just lifting off.

EXFO Stock Overview

5G might be revolutionary, but like all technology, it still needs to be monitored and updated. That’s where EXFO comes in.

The company provides testing, monitoring, and analytics solutions for fixed and mobile network operators, webscale companies, and equipment manufacturers. (Source: “Company,” EXFO Inc, last accessed July 28, 2020.)

EXFO’s real-time test monitoring/troubleshooting and analytics solutions help speed up digital transformations related to fiber, 4G/LTE, and 5G deployments.

You might not be all that aware of EXFO Inc, but the industry giants are. With more than 2,000 customers around the world, the Quebec, Canada-based company is the market leader in optical test equipment and is among the top five providers of communications monitoring. (Source: “Needham Growth Conference,” EXFO Inc, January 15, 2020.)

EXFO’s customers include 95% of the largest communications service providers, most network equipment manufacturers, and the leading webscale companies.

Chart courtesy of StockCharts.com

Solid Third-Quarter Results

On July 3, EXFO announced its financial results for the third quarter of fiscal 2020, ended May 31. (Source: EXFO Inc, July 8, 2020, op. cit.)

Third-quarter revenue slipped 10.1% year-over-year to $66.1 million. “Test and Measurement” sales accounted for 75% of revenue while “Service Assurance, Systems and Services” revenue made up the rest.

The company reported third-quarter net income of $3.2 million, or $0.06 per share, compared to third-quarter 2019 net earnings of $21,000, or break-even per share. That net income included $1.4 million in after-tax amortization of intangible assets, $500,000 in stock-based compensation costs, and $100,000 in foreign exchange loss.

EXFO Inc’s third-quarter 2020 net earnings also included $2.4 million from the Canadian government as an after-tax wage subsidy to help companies reduce the negative economic effects of COVID-19.

Adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) came in at $10.7 million, or 16.1% of sales, up from $7.9 million, or 10.7% of sales, in the third quarter of 2019.

“Despite constraints and restrictive measures in many countries, EXFO navigated through the coronavirus pandemic with a solid financial performance in the third quarter of 2020,” said CEO Philippe Morin.

He added,

We delivered encouraging sales in a difficult environment and proactively implemented cost-controls, while benefiting from a Canadian government wage subsidy program. The end-result was strong earnings amid end-markets that will necessarily improve as long-term drivers like fiber and 5G deployments remain intact.

(Source: Ibid.)

Analyst Take

EXFO Inc’s test monitoring and analytics solutions are essential for the telecom industry, including companies using 5G technology. And because the company is located in Canada, it isn’t fazed by any trade war or rising tensions between the U.S. and China.

To that end, the company reported solid third-quarter revenue, strong earnings, and an encouraging outlook. That bodes well for EXFO stock.