II-VI: IPhone Is Lumentum’s, Finisar’s Problem, Not Theirs, Says Benchmark

By Tiernan Ray

Shares of laser maker II-VI (IIVI) are up 30 cents, or 0.9%, at $33.10, rebounding from yesterday’s 4% drop, after rumors circulated yesterday that there have been delays in the product ion of Apple‘s (AAPL) next iPhone, presumably an “iPhone 8,” expected later this year, possibly because of the device’s “vertical-cavity surface-emitting laser” diode, or VCSEL, a part that II-VI, among others, produces.

Rushing to the stock’s defense this morning, The Benchmark Company’s Mark Millerreiterates a Buy rating, and a $40 price target, writing that this is actually not something to get upset over.

In Miller’s view, lasers for an iPhone, or any other phone, were never going to be a big deal for the company this year, but rather next year.

Instead, this is actually something that should be a concern for Lumentum Holdings (LITE) and Finisar (FNSR), which have more riding on VCSELs this year:

We attribute this [stock volatility] to some investors’ belief that VCSELs would represent a significant revenue opportunity in 2017 for II-VI. The plan is for II-VI to transfer the VCSEL process to its ANADIGICS fab in Warren, New Jersey. However, from our direct experience in a wafer fab, the combined transfer of a manufacturing process to an overseas fab on a larger-sized wafer can be challenging. As such, we caution investors about assuming instant gratification, as we believe it will take six to nine months to produce a high-yielding U.S. manufacturing process. In our recent meetings with investors, II-VI management emphasized that its U.S. VCSEL ramp will primarily occur in 2018. Also, the intro of Samsung’s Galaxy S8 phone did not include VCSEL-based sensing technology. While we believe these reports have recently pressured II-VI’s shares, we believe potential iPhone 8 delays, concerns about Lumentum and Finisar meeting the iPhone 8 VCSEL ramp and Samsung’s decision to hold off on VCSEL-based sensors are rather good news for II-VI, and potentially bad news for the assumed first movers: Lumentum and Finisar. Thus, we would use any weakness as a buying opportunity