A China Trade Resolution Would See NeoPhotonics Stock Surge

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NeoPhotonics Corp Would Benefit From a Trade Resolution 

The seemingly never-ending U.S.-China trade war has negatively impacted many software and hardware technology companies, and a resolution would give the sector a boost.

A micro-cap networking solutions company that’s tied to the Chinese technology sector is NeoPhotonics Corp (NYSE:NPTN). It develops and manufactures technologies to allow data to move in high-speed, high-bandwidth communications networks.

NPTN stock plummeted to a 52-week low of $3.26 in May after the U.S. placed sanctions on the sale of certain technologies to Chinese companies. A major portion of NeoPhotonics’ revenues are generated in China, so the risk of lost revenue is a concern.

While the restrictions remain, there is hope that the trade war will be resolved.

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NeoPhotonics stock rallied 23% over the past three months but it fell 27% over the past year and is down 8.6% year-to-date.

The outlook for NPTN is contingent on whether we see progress in the trade talks and a removal of the restrictions of sales to China.

NPTN stock could surge if the company can sell its solutions to Chinese technology companies without interference. On the other hand, a continuation or escalation of the trade war could cripple this stock.

The below NeoPhotonics stock chart shows indecisive trading. There is some support for the stock at $5.00 and resistance at $8.00 to $10.00.

Chart courtesy of StockCharts.com

Fundamentals Support Bull Case for NPTN Stock 

The revenue picture for NeoPhotonics Corp has been flat over the last five years, which has hampered its stock price.

There was some optimism in 2018, but the company needs to deliver consistency.

Fiscal Year Revenues (Millions) Growth
2014 $306.2
2015 $339.4 10.9%
2016 $411.4 21.2%
2017 $292.9 -28.8%
2018 $322.5 10.1%

(Source: “NeoPhotonics Corp.,” MarketWatch, last accessed October 25, 2019.)

NeoPhotonics is expected to grow its revenues by 6.1% to $342.3 million in 2019, followed by growing its revenues by 6.9% to $365.8 million in 2020. (Source: “NeoPhotonics Corporation (NPTN),” Yahoo! Finance, last accessed October 25, 2019.)

Much of what happens will depend on the China situation.

NeoPhotonics recorded an earnings-per-share (EPS) loss based on generally accepted accounting principles (GAAP) in four of the past five years.

Fiscal Year GAAP Diluted EPS Growth
2014 -$0.61
2015 -$0.09 114.8%
2016 $0.00 -105.4%
2017 -$1.23 -25,002%
2018 -$0.97 21.4%

(Source: MarketWatch, op. cit.)

There is some optimism for profitability in 2020.

For the current year, NeoPhotonics is estimated to report an adjusted loss of $0.16 per diluted share, an improvement from the adjusted loss of $0.45 per diluted share in 2018.

Profitability could surface in 2020, with NPTN expected to earn an adjusted $0.10 per diluted share. (Source: Yahoo! Finance, op. cit.)

Analyst Take

NeoPhotonics Corp has a market cap of only $289.7 million, but it has strong institutional support, with 146 institutions holding 74.3% of the outstanding shares.

Insiders at NeoPhotonics have also been buying up shares. Over the last six months, insiders added 289,977 shares of NeoPhotonics stock and only sold 12,000 shares. (Source: Yahoo! Finance, op. cit.)

The company’s valuation is attractive at 0.8 times trailing sales and only 1.9 times book value. As mentioned earlier, the U.S. loosening sales restrictions to China would likely lift NPTN stock.