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Here's Why Optical Networking Stocks Fell in December

A bundle of fiber-optic network cables in dramatic blue lighting.

What happened

Shares of many optical networking specialists plunged in December 2017, according to data from S&P Global Market Intelligence .

Lumentum Holdings (NASDAQ: LITE) ended the month 9.5% lower, Infinera (NASDAQ: INFN) investors took a 12.6% hit, and Applied Optoelectronics (NASDAQ: AAOI) fell 13.4%. Many others saw smaller price reductions, but these were the industry's biggest losers in December.

A bundle of fiber-optic network cables in dramatic blue lighting.

Image source: Getty Images.

So what

The sectorwide plunge started with a negative analyst note on Applied Optoelectronics. The maker of fiber-optic networking components such as lasers and transceivers is a major supplier of networking tools to (NASDAQ: AMZN) , and analyst firm Cowen & Co. fears that Amazon's move to newer and faster transceivers will hurt the company in the short term. Share prices fell 8% on that cautious report, dragging Applied Optoelectronics' peers along for smaller price drops.

Later on, Finisar (NASDAQ: FNSR) broke out of its own slump when Apple (NASDAQ: AAPL) invested $390 million in the company's laser research. These lasers play an important part in the iPhone X's face-scanning features, making Finisar an essential Cupertino partner. Finisar shares surged as much as 30% higher that day , though the gains faded out and Finisar shares closed December just 1.7% higher. But fellow laser-builders Infinera and Applied Optoelectronics fell on the same news, since Apple doesn't seem likely to reach out for alternative laser suppliers after a move like that.

And throughout the month, analysts kept repeating the mantra that Chinese networking investments are picking back up after a tough year -- but slowly. Even a large Lumentum order from China Telecom (NYSE: CHA) only lifted Lumentum's shares by a couple of percent. Between Amazon's generation-shifting networking issues and soft Chinese growth prospects, the fiber-optic networking market as a whole is operating under some dark clouds.

Now what

December's fiber-optic worries were real enough. Still, the long-term view for this industry remains strong.

Telecom and data networks around the world are only speeding up and taking on more bandwidth. Even the wireless improvements inevitably lead to upgrades in the fiber-optic infrastructure that connects cell towers to the internet at large. And you know that cloud computing is running hot when a cloud specialist like Amazon drives a significant portion of the world's optical networking component needs.

So things are running a bit slow at the moment. Regulatory uncertainty plays a large part here, both in China and America. Standards bodies are putting the finishing touches on 5G wireless technologies, among other things, and there's a hidden groundswell of upcoming hardware needs that just aren't quite ready to be met yet.

All three of last month's biggest dips are tied to high-quality businesses. Among them, Applied Optoelectronics seems to offer the biggest opportunity for a strong bounce, while Lumentum and Infinera provide more stability. All of them look like solid buys at the bargain prices of early 2018.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Anders Bylund owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon, Apple, and Infinera. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. 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.

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