Jefferies is out with a major negative call on Infinera (NASDAQ:INFN) downgrading the shares to Underperform from Hold and lowering their target to $6.75 (prev. $8).
The analyst notes that in recent days, they have been doing checks on Infinera's business with Level 3.
HAS HUAWEI BROKEN INTO LEVEL 3? Firm's recent checks with industry contacts suggest that Level 3 has been running a long haul WDM RFP process. Moreover, their checks are indicating that Huawei has won the business. Obviously, this has negative implications for Infinera. The equipment vendor is the sole supplier of long haul WDM gear to Level 3. The carrier accounted for 24% of Infinera's revenue over the past year.
WORST CASE FOR INFINERA: THEY LOSE THE BUSINESS OUTRIGHT. In a worst case scenario, they expect Infinera – over time – to lose roughly $75 million in annual sales with Level 3. Of course, any transition would take time. Moreover, Level 3 would continue filling out the installed base of Infinera DTN chassis with new modules. Over time, this revenue stream would dwindle as well.
BEST HOUSE IN A BAD NEIGHBORHOOD? The Level 3 outcome is likely a major step backward in Infinera's revenue run rate. The ugly situation at Level 3 reinforces Jeffco's concerns about the longer term margin profile of the business. They are concerned about the company's ability to translate its technology advantage into interesting levels of profitability.
DOWNGRADING TO UNDERPERFORM... From firm's perspective, it's now difficult to justify a premium valuation while their views on revenue growth and profitability are worsening. With the loss of business at Level 3, it's quite likely that our numbers will come down. They expect to adjust their model after the company reports Q2 tomorrow.
Notablecalls: George Notter and his Comm. Equipment at Jeffco have done an excellent job with their checks. The call should have a very negative impact on INFN's share price today. I'm guessing 10-15% downside.
What I have learned from similar calls in the past is that there is usually money to be made shorting the open. They gap'em down but soon enough sellers return...and take the stock down by another 5-7%.
The analyst notes that in recent days, they have been doing checks on Infinera's business with Level 3.
HAS HUAWEI BROKEN INTO LEVEL 3? Firm's recent checks with industry contacts suggest that Level 3 has been running a long haul WDM RFP process. Moreover, their checks are indicating that Huawei has won the business. Obviously, this has negative implications for Infinera. The equipment vendor is the sole supplier of long haul WDM gear to Level 3. The carrier accounted for 24% of Infinera's revenue over the past year.
WORST CASE FOR INFINERA: THEY LOSE THE BUSINESS OUTRIGHT. In a worst case scenario, they expect Infinera – over time – to lose roughly $75 million in annual sales with Level 3. Of course, any transition would take time. Moreover, Level 3 would continue filling out the installed base of Infinera DTN chassis with new modules. Over time, this revenue stream would dwindle as well.
BEST HOUSE IN A BAD NEIGHBORHOOD? The Level 3 outcome is likely a major step backward in Infinera's revenue run rate. The ugly situation at Level 3 reinforces Jeffco's concerns about the longer term margin profile of the business. They are concerned about the company's ability to translate its technology advantage into interesting levels of profitability.
DOWNGRADING TO UNDERPERFORM... From firm's perspective, it's now difficult to justify a premium valuation while their views on revenue growth and profitability are worsening. With the loss of business at Level 3, it's quite likely that our numbers will come down. They expect to adjust their model after the company reports Q2 tomorrow.
Notablecalls: George Notter and his Comm. Equipment at Jeffco have done an excellent job with their checks. The call should have a very negative impact on INFN's share price today. I'm guessing 10-15% downside.
What I have learned from similar calls in the past is that there is usually money to be made shorting the open. They gap'em down but soon enough sellers return...and take the stock down by another 5-7%.
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