2023-08-17 14:18:04 ET
Summary
- The recent guidance and stock performance of Clearfield, Inc. haven't been received well by investors.
- Despite a significant stock decline over the past year, I firmly believe that Clearfield stock is best avoided due to uncertainties.
- Clearfield's focus on fiber management and connectivity solutions, including the Nestor acquisition, has potential, but caution is warranted given government funding dynamics and declining revenue growth rates.
Investment Thesis
Clearfield, Inc. ( CLFD ), the fiber management and connectivity solutions company, delivered guidance that investors did not welcome .
From time to time, companies lose their ways, or they make large and expensive acquisitions, or perhaps, both. And alas, that's the fate that Clearfield has embraced.
Yes, the stock is down more than 60% in the past year, but looking back to where it was provides no bearing on what lies ahead.
I remain resolute in my stance, that this stock is best avoided.
Rapid Recap
I concluded my previous analysis titled , Clearfield: Unraveling Fiber Fortunes, A Hazy Path Ahead, by declaring,
At the surface level, Clearfield, Inc. investors may believe that the stock is cheaply valued, since it is priced at approximately 17x this year's non-GAAP EPS figures.
However, I contend that until Clearfield stabilizes its operations and returns to top line growth, its gross margin will remain under pressure.
Meaning that until investors regain confidence in Clearfield, Inc. prospects, the multiple that investors will be willing to pay for this stock will remain compressed.
Since I penned that analysis, Clearfield has now reported its fiscal Q3 2023 results. And I believe its outlook cements my assertion, that this stock is not worthy of investing in and that there are better opportunities elsewhere.
Why Clearfield?
Clearfield specializes in fiber management and connectivity solutions for communication service providers.
On the back of its Nestor acquisition, Clearfield's focus is on enabling efficient and cost-effective deployment of fiber-optic networks for telecom service providers.
Their offerings include innovative products that simplify the deployment and management of fiber optic networks. Clearfield's value proposition lies in its ability to accelerate network connectivity by providing scalable fiber management solutions tailored to the needs of its clients.
Moving on, the government's funding programs Broadband Equity, Access, and Deployment program (''BEAD'') is expected to disburse funds to states, and as such the industry is expected to return to a more normalized cadence of deployment.
BEAD's allocation of $42.45 billion towards high-speed Internet access is projected to contribute to industry growth of 13% to 15% over the next several years.
Here's a quote from the earnings call that illustrates this insight,
In order to compete for BEAD funding, service providers are required to contribute matching funds to each deployment. To ensure that they have the necessary financing and capital available, we expect our community broadband customers to continue to be cautious with respect to near-term deployments, particularly given rising interest rates and labor costs.
The word ''cautious,'' when used by companies, is typically meant to mean reduced demand. That's not always the case, but I believe it is the case with Clearfield.
Furthermore, Clearfield anticipates significant demand in its core demographic starting late next year , driven by the availability of government funding. Here's a quote echoing this contention,
[...] third-party industry analysts expect the industry to grow at 13% to 15% for the next several years, driven substantially by these funding initiatives. [...] We anticipate significant demand in our core demographic starting late next year and continuing for the next several years.
However, we cut and dice this narrative, the facts point to a prolonged period of unappetizing growth rates, which is what we turn to discuss next.
Revenue Growth Rates Are Pointing in the Wrong Direction
The graphic above is a reminder of the lull in revenues that Clearfield is facing as it navigates fiscal Q4. I had already made the case that Clearfield would have a lull in revenues in my previous analysis, so this shouldn't have come as much of a surprise to readers.
What's more, not only is there no immediate BEAD funding to improve Clearfield's prospects, but compounding matters, Clearfield's comparables into fiscal H1 2024 aren't likely to be enticing to many investors.
How Should Investors Think About Clearfield's Valuation?
I believe that having to pay 17x this year's non-GAAP EPS for Clearfield is a rich multiple. Why?
Not only is Clearfield's revenue base evidently shrinking with time, but also, the size of the deceleration from one quarter to the next should spark some level of investor concern.
Even though the share price has come down a lot in the past year, I'm still not finding this valuation to be attractive. What makes me so bearish on Clearfield?
Consider the graphic below.
CLFD FQ3 2023
Clearfield's gross margin profile continues to move in the wrong direction. Accordingly, not only does Clearfield have a smaller revenue base, but the margins on those revenues have come down approximately 10 points in 12 months. A rapid decline in a short period of time.
Altogether, I find it too challenging to see how investors will be adequately rewarded with CLFD.
The Bottom Line
Despite a significant decline in the stock price over the past year, my conviction remains firm: Clearfield, Inc. stock is best avoided.
Clearfield's future prospects seem uncertain, especially with the BEAD government funding program not arriving until late next year.
Further, Clearfield's revenue growth rates have been declining, casting doubts on its prospects. In light of these factors, Clearfield, Inc. stock valuation at 17x this year's non-GAAP EPS is unattractive, especially considering shrinking revenue and decreasing margins.
In summary, I find Clearfield's current situation and outlook to be less than promising, making it difficult to envision satisfactory rewards for investors.
For further details see:
Clearfield Fiscal Q3: Fiber Dreams, Valuation Nightmares