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Why Fiber-Optic Networking Stocks Fell in December

Anders Bylund, The Motley Fool

What happened

Many fiber-optic networking stocks fell a long way in December of 2018. Optoelectronic components-maker NeoPhotonics (NYSE: NPTN) suffered a 15.8% drop, according to data from S&P Global Market Intelligence. Fiber laser specialist IPG Photonics (NASDAQ: IPGP) took a 20.3% haircut, while shares of high-power lasers expert Coherent (NASDAQ: COHR) fell 23.5% lower.

So what

The rout started in the first week of December, when Chinese communications giant Huawei's CFO was arrested in Canada on suspicions of violating trade sanctions against Iran. Huawei is a major customer for many fiber-optic hardware providers, accounting for roughly 40% of NeoPhotonics' quarterly revenues.

At the same time, the trade wars between Beijing and Washington continued to simmer. The production pipeline for production-level networking gear often involves shuffling components and systems across the sensitive Chinese-American trade borders, making it more difficult for these companies to hammer out the revenue growth and rising profits that investors would expect. As a whole, IPG Photonics shares fell 47% lower in 2018 and Coherent's investors took a 63% loss.

A bundle of fiber-optic networking cables set against a backdrop of thunderclouds and lightning strikes.

Image source: Getty Images.

Now what

Fiber-networking stocks look cheap, in general, these days but the pressure that's keeping them down must eventually find a release. So NeoPhotonics, IPG, and Coherent might be primed for a big rebound from their current downswings -- but with the usual caveats.

Nobody knows exactly when the trade tensions between China and the U.S. will end or exactly how the resolution will affect the long-term trade policies. Market timing is never easy, but political gamesmanship only adds to the difficulty. So these stocks may continue to swing lower before they turn back up again.

Before we reach the market bottom, some of the weaker hands in this business may file for bankruptcy or get gobbled up by stronger rivals at bargain-bin prices. Separating the winners from the losers in that scramble is beyond the scope of this article, but let's just say that NeoPhotonics looked undervalued a few months ago and I'm impressed by IPG Photonics' rock-solid balance sheet.

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Anders Bylund owns shares of NeoPhotonics. The Motley Fool owns shares of and recommends IPG Photonics. The Motley Fool also owns shares of Coherent. The Motley Fool has a disclosure policy.