Infinera and This Crazy Week
I started looking into Infinera this week. It’s a network equipment provider, competing with the likes of Alcatel Lucent and Ciena. The reason I was interested in Infinera is because of it’s proprietary technology, Photonic Integrated Circuits(PIC), which are smaller and more efficient than normal network equipment. The thesis goes like this: the data industry is growing, the world will inevitably need more data so companies that provide data WILL need to scale up. Also eventually data equipment will need to be replaced(I’m not sure how fast it depreciates). So anyways, when they replace it, they should prefer the more cost efficient PIC technology to competitors.At least that’s how the bull case goes. The bear case says they won’t prefer cost efficient tech b/c they have significant sales relationships with the big boys already, so they won’t back down into new territory. New technology isn’t always better. The bear case is also that Infinera is burning cash as it continues to invest in new products and so it isn’t really quite profitable yet.
The reality? It really reminds me a lot of OCZ, a company I recently analyzed, except it has much better attributes. It has higher gross margins than the incumbents, by about 10%. It has significantly better technology, such that it could be argued it has differentiated in a commodity industry, and therefore it’s reasonable to see it taking market share in the future. However, it has a much bigger problem in that the incumbents are much stickier.
Ultimately, I decided that cash burn shouldn’t be a problem because the business is flush with cash and at its worst it could just invest in R&D at the same rate as competitors and it would be profitable. However, I don’t know what it takes to get customers in this industry. If I wasn’t stuck in college application frenzy, I would look into this because it appears that there might be some real opportunity here. If Infinera could get 1 major break from a big player, it would be able to really increase its operations significantly.
Sad Reality is I don’t have time to do the research, so I can’t say. If I was to look deeper into Infinera, here’s what I would do:
1) figure out what the product DOES. How it works. What customers look for. How the product is made. 2) How often is network equipment replaced? How fast is data demand growing? 3) Infinera has gotten a few smaller customers. How? Do they like the product? 4)How sticky are the current service providers to Lucent/Ciena? What might it take to convince a Verizon or an AT&T to buy in? 5) If Infinera had to scale up, could it? 6)Do a rudimentary Asset Reproduction and Earnings Power Valuation.
Anyways, the questions here involve a lot of industry research, product research and tech understanding. I’m sure I could learn it given time, and it really might be worth it. I encourage anyone who goes through with this research to give me a heads up.