Shares in fiber-optic component makers fell Wednesday amid worries over future China demand, with Oclaro (OCLR) shares taking the biggest hit.
Oclaro stock tumbled 12.4% to 7.92 in heavy volume in the stock market today. Finisar (FNSR) stock slipped 3% to 22.58. Shares in Lumentum Holdings (LITE) shed 8% to 43.55. Applied Optoelectronics (AAOI) stock was down 3.9% to 47.47, while NeoPhotonics (NPTN) stock edged down 1.6% to 7.92.
IBD's Telecom-Fiber Optics group tumbled 5.1% overall, easily the worst performing out of 197 industries. Fiber optic stocks have been volatile, with worries over demand in China overshadowing strong orders from internet companies upgrading data centers to faster communications.
Dmitry Netis, analyst at William Blair, cited two concerns regarding Chinese telecom equipment giant Huawei, including gloomy comments from chipmaker Macom Technology (MTSI) late Tuesday.
"The company cited weakness in China from inventory buildup at Huawei (other customers including ZTE were said to be less affected). If this is not enough, a New York Times article noted the U.S. Commerce Department is widening its investigation into whether Huawei broke American trade controls on Cuba, Iran, Sudan, and Syria under the previously unreported subpoena sent to Huawei in December."
China in 2016 was a hot market for optical technology as its telecom companies upgraded both 4G wireless and landline broadband networks. Worries that orders from China's Huawei and ZTE were slowing down have pressured fiber-optic stocks earlier. While spending eased in late 2016, some analysts have been expecting a new round of contracts to be awarded this spring, with equipment orders rebounding in the back half of 2017.
According to a UBS report, NeoPhotonics has the highest exposure to China at 60% of revenue, followed by Oclaro at 40%, Acacia Communications (ACIA) at 40%, Lumentum at 30%, and Finisar at 20%.
Acacia plunged 11.2% Wednesday. Shares of another fiber firm, Ciena, rose 0.3%.
IBD'S TAKE: Applied Optoelectronics tops the Telecom-Fiber Optics group with an IBD Composite Rating of 97 out of a possible 99, meaning shares have outperformed virtually all stocks in key metrics over the past 12 months. Before today's sell-off, the group ranked No. 9 out of 197 industry groups. To learn about them and other companies, visit the IBD Stock Checkup.
Aside from China, the data-center market has been a bright spot. Internet companies Facebook (FB), Google parent Alphabet (GOOGL) and Amazon.com (AMZN) are building data centers.
One problem, analysts say, is that too many fiber-optic component suppliers are chasing after growth opportunities. The overcrowded industry, they say, could use a round or two of consolidation to improve profits.
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