After posting our piece on optical systems yesterday, we took a look at how optical stocks did over the past few years. With surging demand for all things Cloud, and data center builds that remained really strong even during the pandemic, surely optical stocks outperformed…
They did not.
The chart below is the common size stock price price performance of some prominent pure-playish optical stocks. Starting with January 1, 2020 set to 100, the optical stocks all underperformed NASDAQ. And except for a brief period for two names, this underperformance lasted throughout the period.
Ok, so this reflects the recent turmoil in the markets with a lot of technology stocks getting punished. Maybe if we looked back further. This time we started in 2018.
Here the story is a little bit better. Ciena, the biggest optical system pure-play did outperform the NASDAQ for the entire period. But none of the others did. Moreover, the companies that did better on the shorter time frame did worse on the longer time frame, highlighting just how volatile these companies are.
Either way we look at it, during a period of a strong bull market and some of the best industry demand ever recorded, the optical stocks turned in some underwhelming performances.
This alone does not prove that optical is a bad sector. And it does not speak to the future of the sector, which as we highlighted yesterday could be poised for a marked improvement (maybe). But it does speak to the pain of investing in this sector. Timing is very difficult here.
All of these companies suffer from long sales cycles to a small, demanding pool of customers. This leads to highly unpredictable quarterly results, and thus the high volatility of their stocks.
But surely, over the long term their value should become apparent.
Below is the 20-year view of Ciena, again one of the best in the industry. And the picture is not encouraging. Even setting aside 1990’s Irrational Exuberance, the stock did not move for close to a decade. Only since 2018 has the stock shown any sign of fundamental value growth.
It is hard to think that optical companies will not show their value some day, but it may not be easy to determine when that will be.
Try looking at the semiconductor companies operating in the optical market – IPHI, ACIA, MTSI. The picture will be different.
Those are more diversified, they do more than optical.
I was under the impression IPHI was much more focused on optical than, e.g. CIEN or INFN given how much more hardware and software needs to go into the optical switches vs. the pure optical/electro-optical components that IPHI produced prior to its acquisition.
Fair point regarding customer power limiting CIEN/INFN pricing power, though wouldn’t long sales cycles be a good thing for CIEN/INFN since it increases the hurdle for share shifts?
Fair point, I’m mixing systems and components here, but I don’t think that changes the outcomes.
I would say long sales cycles are a barrier to entry and have done a lot to winnow out the field of competitors, but it makes it impossible for these companies to build credibility on the Street. They are always going to be missing quarters. In fairness, this is a criticism of the Street more than of the companies. But they are still stuck with the fact that they do not having much negotiating leverage with customers .