Infinera Corp. (INFN) PAM-4 Boogeyman

Infinera Corp. (NASDAQ:INFN) PAM-4 Boogeyman

The $INFN PAM-4 boogeyman was probably born at the time PAM-4 was first conceived a couple of years ago. However the PAM-4 scare appears to have hit INFN shares after Microsoft announced earlier this year that it would deploy Inphi PAM-4-based optics for Data Center Interconnect (DCI).

INFN NTM EPS vs. Stock Price

Up-and-Coming Small- and Mid-cap Portfolio Managers #MICUS (Morningstar Conference)

InvestorsNotes from Laird Bieger of Baron Capital, Mark Wynegar of Tributary Capital Management, and Amy Zhang of Alger Funds' presentation from the 2020 Monringstar Investment Conference. Q2 2020 hedge fund letters, conferences and more Up-and-Coming Small- and Mid-cap Portfolio Managers Our manager research team has been publishing its semiannual Morningstar Prospects report for several years. Read More


As the chart shows, INFN shares declined after Microsoft’s PAM-4 announcement in March. INFN stock prices seem to be no longer tracking expected NTM EPS trajectory.

INFN NTM P/E vs. YoY Revenues

INFN’s NTM P/E multiple compressed over the last couple of years, even though gross margins and EPS both increased over that period. The P/E multiple compression was likely driven by deceleration in revenues, as well as fear of PAM-4.

INFN Short Interest % of Float

An increase in short interest in INFN shares following Microsoft’s PAM-4 announcement in March-2016 is supportive of the idea that investors have become concerned about the threat posed by PAM-4 to Infinera’s stated DCI growth strategy.

DCI is widely regarded as one of the fastest growth opportunities within the broader Cloud infrastructure category. PAM-4 is designed to cost-optimize both intra-data-center and inter-data-center connectivity, with the latter up to ~80km. Infinera has targeted the >40km DCI market with its Coherent DWDM products, including Cloud Xpress.

Inphi, the industry leader in PAM-4, has suggested the following market segmentation for different networking technologies, according to a corporate update presentation posted on its website.

IPHI Networking Market Segments

Inphi’s market segmentation as well as 1Q16 earnings call commentary suggests Inphi views PAM-4 as being a complementary technology to Coherent DWDM. It is worthwhile to note that Inphi itself benefits from significant business in the Coherent DWDM category – business that it would probably not want to see truncated due to PAM-4.

A value investor would conservatively assume that PAM-4 is every bit as revolutionary and disruptive as it has been claimed to be by Microsoft and Inphi. Accordingly, it is fair to expect some cannibalization of Coherent DWDM by PAM-4. However, it would seem overly bearish at least in the near term (i.e. next couple of years) to assume that DCI opportunities targeted by Coherent DWDM would be monopolized by PAM-4. Also, even though the company may not have said so, it is possible that Infinera in the future might decide to join NeoPhotonics to participate in the PAM-4 revolution.

THIS ARTICLE IS NOT AN EQUITY RESEARCH REPORT.
Disclosure: As of this writing I owned a long position in INFN, but no positions in IPHI, NPTN or MSFT.
Additional Disclosures and Disclaimer
Stock market data provided by Sentieo.