NeoPhotonics Corp Up 150% From 2019 Lows, Should Soar Higher

NeoPhotonics Corp Up 150% From 2019 Lows & Remains BullishNeoPhotonics Corp Climbs Higher Following Strong Q3

The Nasdaq is trading at record levels—up 30.5% year-to-date—and it remains bullish heading into the final month of the year.

Investor sentiment is being buoyed by strong corporate earnings, U.S. economic data, and growing optimism that the U.S. and China will soon ink an interim trade deal.

The latter is paramount to the health of the tech industry, since the U.S./China trade war has been a major headwind to many software and hardware companies.

One tech stock that would benefit even further from a trade resolution is NeoPhotonics Corp (NYSE:NPTN). I say “further” because NPTN stock has been on fire since hitting a 52-week bottom of $3.26 on May 17, soaring 150% to the current price of $8.15.

NeoPhotonics stock tumbled in May after the U.S. placed sanctions on the sale of certain technologies to Chinese companies. A huge portion of NeoPhotonics’ revenue comes from China.

Hints of optimism surrounding a truce between the world’s two largest economies have helped NTPN stock rally since then. Well, that and strong second-quarter and third-quarter results showing that NeoPhotonics can still grow its sales despite a trade war.

After Rallying 150%, NeoPhotonics Stock Could Still Double

Despite the recent volatility, a resolution between Washington and Beijing should see the NeoPhotonics share price surge even further.

If there is positive movement between the two superpowers, a 12-month price forecast for NPTN stock of $18.25 (which takes it back up to where it was trading in September), would be a 125% increase from its current level.

There is reason to believe a trade resolution is on the horizon.

On November 22, Chinese President Xi Jinping said he is hoping that phase one of an agreement that was first outlined in early October can be made. That’s as long as the deal is made on the basis of mutual “equality.” (Source: “Trump, Xi Talk Past Each Other on Need for Win-Win Trade Deal,” Bloomberg, November 22, 2019.)

On November 20, when President Donald Trump was asked how the trade negotiations were going, he replied, “I don’t think they’re stepping up to the level that I want.” (Source: “A U.S-China ‘phase one’ trade deal may not be inked this year,” Reuters, November 20, 2019.)

Fast forward two whole days and President Trump hinted that an interim pact could be reached soon, saying “We have a deal potentially very close.” (Source: “Trump: US, China ‘very close’ to trade deal,” Fox Business, November 22, 2019.)

Any kind of movement would be an early Christmas present for U.S. tech companies like NeoPhotonics, which generates a large portion of its sales from China.

NPTN Stock Overview

The San Jose-based NeoPhotonics designs photonic integrated circuits for high-speed, high-bandwidth networks used in telecommunications and data center applications. (Source: “Company,” NeoPhotonics Corp, last accessed November 22, 2019.)

NPTN Stock Information

Market Cap $393.1 Million
52-Week Change 3.3%
52-Week High $8.73
52-Week Low $3.26
Shares Outstanding 48.2 Million
Float 48.2 Million
50-Day Moving Average $7.13
200-Day Moving Average $5.68

(Source: “NeoPhotonics Corporation (NPTN),” Yahoo! Finance, last accessed November 26, 2019.)

Q3 Revenue Up 13%, Swings to Profitability

On October 31, NeoPhotonics announced that its third-quarter revenue, for the period ended September 30, increased 13% sequentially and year-over-year to $92.4 million. (Source: “NeoPhotonics Reports Third Quarter 2019 Financial Results,” NeoPhotonics Corp, October 31, 2019.)

Third-quarter net income was $2.2 million ($0.05 per share), up from a net loss of $7.3 million ($0.16 per share) in the previous quarter and up from a net loss of $8.1 million ($0.18 per share) in the third quarter of 2018.

NeoPhotonics reported third-quarter adjusted net income of $0.11 per share, up from a net loss of $0.03 per share in the previous quarter and up from a net loss of $0.05 per share in the third quarter of 2018.

Adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) was $14.2 million, up 108% from $6.8 million in the previous quarter and up 131% from the $6.2 million recorded in the third quarter of 2018.

“Solid execution, strong customer demand, and cost reduction combined for a profitable quarter for NeoPhotonics,” said Tim Jenks, chairman and CEO.

“Despite the trade tensions, we believe the macro trends of the industry favor our core capabilities…”

He’s right. NeoPhotonics Corp reported strong order volumes from data centers and telecom markets, including an uptick in orders from Chinese customers. No matter where you live, you need fiber-optic networks, and that has been helping juice NeoPhotonics’ sales.

During the company’s third-quarter earnings call, CFO Elizabeth Eby said that certain key customers in both the West and China are building additional inventory to deal with increased demand to mitigate their supply chain risks. (Source: “Edited Transcript of NPTN earnings conference call or presentation 31-Oct-19 8:30pm GMT,” Yahoo! Finance,  November 16, 2019.)

As a result, NeoPhotonics expects its margins to grow with cost reductions offset by annual price negotiations.

This bodes well for NeoPhotonics stock, even if there is no immediate resolution to the trade war. If there is a resolution though, it’s an even bigger win for NPTN.

Analyst Take

As mentioned earlier,  NPTN stock took a hit in May on growing concerns over how the U.S/China trade war would impact the company’s bottom line. Since then, NeoPhotonics stock has rallied 150%, fueled by strong third-quarter revenue growth (swinging to profitability) and by increased sales from China.

NeoPhotonics Corp’s management team has said it continues to monitor the meandering status of the U.S./China trade war and global macroeconomic environment. It is also making changes in order to drive profitability in the second half of 2019 and on a consistent basis.

During a trade war, that’s great news for NPTN investors. It’s even better news knowing that the trade war will eventually be over.