The rapid consumer adoption of cloud computing and 4K video is leading to massive increases in demand for bandwidth. That's an encouraging backdrop that should be driving huge demand for optical equipment like Infinera 's(NASDAQ: INFN) .
Unfortunately, that hasn't been the case as of late. During its last two quarterly earnings reports, Infinera warned that demand for its products was softening. The downbeat outlook caused traders to sell off the stock hard : Shares ended 2016 down more than 51%.
Can the company get back on track? Here's a look at three key areas I think investors should watch in the year ahead.
INFN Gross Profit Margin (Quarterly) data by YCharts .
The company actually continued this positive trend in its third-quarter report. Infinera reported a non-GAAP (generally accepted accounting principles) gross margin of 49.2%, which was up 170 basis points over the same quarter in 2015. That's an impressive performance given the large revenue decline.
Unfortunately, management does not believe that it will be able to pull off this same trick in the fourth quarter. The declining sales volume is expected to cause non-GAAP gross margin to plunge to between 40% and 42%.
Investors will need to listen in on the company's conference call to learn whether this is a simply a one-time blip or it represents a new normal.
3. How are competitors faring?
With Infinera muddling through such a low-demand period, you might assume that competitors like Ciena (NYSE: CIEN) are also going through a tough time. However, here's how Ciena's CEO Gary Smith started off that company's fiscal fourth-quarter conference call in December:
That's quite a bullish statement to be coming from a major rival. While Infinera has a history of nibbling away market share, investors should also keep an eye trained on competitors like Ciena to see if the company's competitive edge could be slipping.
All in all, Infinera has a lot to prove in 2017.
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Brian Feroldi has no position in any stocks mentioned. Like this article? Follow him on Twitter, where he goes by the handle @BrianFeroldi , or connect with him on LinkedIn to see more articles like this.
The Motley Fool owns shares of and recommends Infinera. The Motley Fool has a disclosure policy .
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
