Why Corning Shares Are Down 5% Today

Corning (GLW 4.80%) Shares were up 5.2% by 1:05 pm ET Wednesday afternoon after Deutsche Bank analyst Matt Niknam raised his price target for the glass maker to $49 a share and reiterated his recommendation of purchase.

Looking ahead to the next three years, Niknam suggests there’s a good chance Corning will enjoy 15% annual earnings growth as its products see greater demand to facilitate the growth of the artificial intelligence (AI) economy.

What Deutsche Bank says about Corning

Yes, you read that right. Deutsche Bank just named Corning an AI stock. But why?

In today’s note covered by StreetInsider.com, Niknam points to Corning’s fiber optic business, which, at more than 30% of revenue, is the company’s largest revenue generator. Growth in this segment is “reaccelerating”, the analyst says, and is likely to increase to 14% annually between 2024 and 2027, leading to “improved profitability and cash flow (without a material ramp in capex)”.

Which makes sense. That is, AI servers aren’t particularly useful if they can’t provide answers to AI users’ questions. And fiber optic cables are the way to go for such communications. Logically, if the volume of AI traffic increases, the demand for fiber optic cables to carry that traffic will also increase. And Corning, with a 17.5 percent market share in fiber optics, would be a logical beneficiary of that growth.

Is Corning Stock a Buy?

That still remains the question of valuation. Growth aside, is Corning stock cheap enough to buy? Not at first glance — not at all! With a market cap of $38.2 billion but just $437 million in earnings over the past 12 months, Corning stock is selling at 87 times trailing earnings. Even at a 15% increase, that’s a big price to pay.

Now, the good news is that Corning is generating more free cash flow than it reports as net income — $938 million in the past year. The bad news is that this still leaves the stock trading for an expensive price-to-free cash flow ratio of 41. (And that’s before counting debt.)

As bright as its prospects may seem, Corning’s stock still costs too much.