NeoPhotonics: Zacks’ Bull of the Day Play

NeoPhotonics (NPTNSnapshot Report) is benefitting from a long term trend in the tech sector. Big companies like Facebook (FBAnalyst Report), Google and Apple (AAPLAnalyst Report) are all building very large data centers that cost billions of dollars each. NPTN is part of the supply chain for these huge investments. Analysts have recently increased their earnings estimates and that has helped push the stock to a Zacks Rank #1 (Strong Buy) and today it is the Bull of the Day.

Data Center Thesis

I have identified several stocks that benefit from the recent trend of tech companies building out massive data centers. This is one of those companies as the data center needs to be able to hand the massive amounts of data that comes in on fiber optic lines.

Description

NeoPhotonics makes hybrid photonic integrated optoelectronic modules and subsystems for bandwidth-intensive, high-speed communications networks. Its products include transmitter, receiver, and switching products for 100 gigabits per second (Gbps) optical transmission applications over distances of 2 to 2,000 kilometers. NeoPhotonics was founded in 1996 and is headquartered in San Jose, California.

Earnings History

The company beat the Zacks Consensus Estimate in each of the last four quarters so that is great, but the best part is the last two quarters saw 200% positive earnings surprises.

In the most recently reported quarter, which hit the wire back on May 7, the company posted a gain of $0.06 when the Zacks Consensus was looking for a loss of $0.06. So that was a 200% positive earnings surprise, and as a result, the stock was up more than 24% in the session following the release. That is what I am talking about!

The company reports again on or about August 6, and Wall Street is looking for $85M in revenue and EPS of $0.15. The Zacks EPS number is $0.11 due to how we treat options expenses.

Earnings Estimates

This story is something that will catch on pretty soon. I see that the Zacks Consensus Estimate was calling for a loss of $0.25 back in February, but that saw a huge swing to a gain of $0.08 the next month. In May the number launched again to $0.30 and then added a nickel in June. The number has held still in July, but earnings are right around the corner.

The 2016 numbers saw a similar move and are resting at $0.45 for now. I would not be surprised to see that number move much higher after the next earnings release.

Growth

Topline growth is crucial to long term success, especially for a small cap company like NPTN. I see they posted revenue growth of 8.5% in 2014 and are expected to improve on that this year to 9.2%. Those are nice numbers, but I really want to see double digit revenue growth. Right now, analyst are calling for 7.4% revenue growth, but again, I think that number will move up after some time and the next earnings report.

EPS grew 22% last year and is exploding this year to 170%. That is great to see, especially when we will have two quarters of that huge growth. Next year analysts are calling for EPS growth of 29% on top of the 170% move for this year… so that is good to see.

Chart

Zacks has developed a chart that helps investors see how earnings estimates have impacted the price of the stock over the last several years. We call this chart the price and consensus chart, and each color coded lines represents analyst estimates over a designated year. As estimates increase, the stock tends to follow. The Zacks Rank is impacted by earnings estimate increases, beats and incorporates the idea of analyst agreement and magnitude. As a Zacks Rank #1 (Strong Buy) we see that estimates are moving higher.

Follow Brian Bolan on twitter at @BBolan1

Brian Bolan is a Stock Strategist for Zacks.com. He is the Editor in charge of the Zacks Home Run Investor service, a Buy and Hold service where he recommends the stocks in the portfolio.

He also run the new Stocks Under $10 Investor service where he looks for low priced stocks that are seeing positive earnings estimate revisions. This popular service has seen some strong early returns and offers a free trial via the Zacks Ultimate

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