Markets

Why Shares of NeoPhotonics Are Soaring on Monday

What happened

Shares of NeoPhotonics (NYSE:NPTN) are up more than 10% on Monday after the telecom equipment company received an analyst upgrade. After two days of declines that cost the company nearly half of its market value, B. Riley FBR has called a bottom.

So what

NeoPhotonics was in a free fall last week following a decision by the U.S. government to designate Chinese telecom equipment giant Huawei Technologies as a company engaged in activities that are contrary to U.S. interests. The designation restricts Huawei from buying equipment or licensing technology from U.S. companies.

A hand-drawn stock chart points higher.

Image source: Getty Images.

Given that Huawei accounted for about 44% of NeoPhotonics' sales in the most recent quarter, the move could be devastating to the supplier's outlook. The decision led to at least two downgrades of NeoPhotonics shares due to uncertainty about how the company will proceed.

B. Riley FBR analyst David Kang said "enough" on Monday, upgrading the stock to a buy from neutral while lowering his price target to $5.50 from $7.25. NeoPhotonics' Huawei exposure has been "derisked" following the sell-off, Kang says in a research note.

Now what

Even after Monday's jump, NeoPhotonics shares are still down 26% since May 15. The company has noted in the past that Huawei's huge share of NeoPhotonics' revenue is reflective of Huawei's dominant position in the market and that NeoPhotonics does business with Huawei's competitors as well. But it remains to be seen if a Huawei ban shifts demand to other vendors, especially outside of the U.S.

Kang in his upgrade is saying after last week's fall, there isn't much downside, but in lowering his price target, he is admitting NeoPhotonics faces an uphill battle for as long as the Chinese/U.S. trade war persists. Investors should trade carefully.

10 stocks we like better than NeoPhotonics
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*

David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and NeoPhotonics wasn't one of them! That's right -- they think these 10 stocks are even better buys.

See the 10 stocks

*Stock Advisor returns as of March 1, 2019

Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.

In This Story

NPTN

Latest Markets Videos

    The Motley Fool

    Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.

    Learn More