The Ratings Game: After early Huawei-related rally, dark cloud of reality rains on this stock

NeoPhotonics Corp. led optical-networking stocks higher Monday, though the shares gave back more than half of their gains in the session.

The optoelectronics company stands to benefit if the U.S. is serious about allowing sales to Huawei Technologies Co. once again, since the Chinese telecommunications giant accounted for nearly half of NeoPhotonics’ NPTN, +8.13%  revenue over the past 12 months. President Donald Trump signaled this weekend that he was open to ending the ban on Huawei sales in some capacity, but there’s still plenty of uncertainty over the trade agreement that the U.S. and China will ultimately forge.

NeoPhotonics shares closed up just over 8% on Monday, after rising as much as 22% earlier in the trading session.

“If these sales come back, given the cost cuts already implemented, Neo could see a sharply improved revenue and earnings outlook,” Needham analyst Alex Henderson wrote, adding that the company could potentially return to profitability as well.

Still, Henderson admitted Monday that Trump’s weekend commentary was only a “temporary development that could easily be reversed if trade negotiations break down.” Over the past few months, NeoPhotonics shares have been subject to big swings based on the latest developments in the U.S.-China trade war.

Henderson sees upside potential for both Lumentum Holdings Inc. LITE, +1.98%  and Fabrinet FN, +4.59%  if the Huawei ban is ultimately revoked. He slashed his estimates for Lumentum in particular when Trump first announced the ban, including a 29% reduction in his earnings forecast, but wrote that “this could all reverse” if the U.S. indeed does change course.

Though Acacia Communications Inc. ACIA, +6.96%  has “virtually no Huawei exposure,” according to Henderson, its shares gained as well Monday following a Needham upgrade. Acacia is “pressuring competitors to keep pace” on digital signal-processing technology, he wrote.

Acacia shares finished up nearly 7% in the session, bringing their gains on the year up to 33%. The S&P 500 SPX, +0.77%  has risen 18% in that time.

Read More