Ciena Spikes On Improving Supply, And The Backlog Remains Robust

Supply chain issues hamstrung Ciena (NYSE:CIEN) throughout its fiscal 2022 year, as the company couldn't get the chips and other components it needed to fulfill robust orders from telco, enterprise, and cable companies. The fiscal fourth quarter was a different story, though, as the company was finally able to fulfill more of its component needs, allowing for a double-digit sequential growth rate in its core networking equipment business.

Ciena shares spiked about 20% on the strong fourth quarter beat and management's guidance for FY'23, but the company isn't completely out of the woods yet where margin recovery is concerned. Even so, I believe the shares remain undervalued with more visibility on mid-to-high single-digit revenue growth (stronger over the next few years) and a sustained margin recovery, not to mention share growth in its core markets and expansion into meaningful new adjacent markets.

 

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Ciena Spikes On Improving Supply, And The Backlog Remains Robust

Ciena Needs More Chips To Pull Out Of The Dip

Bullishness on Ciena (NYSE:CIEN) has gotten me nowhere this year, as this large optical networking company has been hamstrung by its inability to secure the parts and components it needs to satisfy demand. While that demand has remained strong, and the company will head into 2023 with a strong backlog, the name seems to be a non-starter with the Street until the company can guide to meaningful sequential revenue growth and margin re-expansion.

Over the longer term, I still like Ciena’s leverage to service provider and webscale deployments, as well as opportunities to grow its routing and PON businesses, and I think the shares can deliver an annualized double-digit return. In the short term, though, it’s hard to see much upside beyond $50 unless and until the supply problems ease and management can guide to meaningful sequential revenue acceleration.

 

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Ciena Needs More Chips To Pull Out Of The Dip

Ciena: Valuation And Opportunity Vs. Supply Chain And (Storm) Clouds

For what small comfort it offers, Ciena (NYSE:CIEN) has been among the better networking names since my last update, with the roughly 7% decline in the share price still better than the performance of a broader group of peers including Cisco (CSCO), Infinera (INFN), Juniper (JNPR), and Nokia (NOK), while Arista (ANET) and Lumentum (LITE) have done slightly better.

This underperformance can be tied back to the supply chain and component availability issues that are affecting the entire sector, reducing companies' ability to ship to demand and weighing heavily on margins. Not only that, some of the bloom is coming off of key end-markets, as spending from cable, cloud, and telco providers seems likely to slow in 2023.

Against that perhaps gloomy backdrop, I still see an argument for owning Ciena shares. The company has about a year's worth of revenue in its backlog and I believe the company has passed at least the halfway point in its supply challenges. Moreover, as the company gains share from Huawei and sells follow-on products into its base, I see more room for margin expansion. Priced for a double-digit long-term annualized return, I think this is a name to consider, albeit with some elevated near-term (two or three quarters) risk remaining.

 

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Ciena: Valuation And Opportunity Vs. Supply Chain And (Storm) Clouds

Ciena Tripped Up On Supply Chain Challenges, But No Real Change To A Strong Multiyear Story

Supply chain challenges added another pelt to the wall when Ciena (NYSE:CIEN) warned in mid-February that the company would miss fiscal first quarter targets due to supply chain challenges, and management subsequently indicated that supply chain pressures remained a risk in the second quarter. While this is a setback, the company still grew more than 10% in the quarter, is still poised to benefit from significant spending growth in telecom and datacom markets, and is still an attractive play on global data traffic.

These shares have given back about 7% since my last update, underperforming rivals like Cisco (CSCO) and Infinera (INFN) by around 7% to 10%, with Nokia (NOK) performing similarly. While the near-term supply challenges take a trivially small amount of my fair value estimates, the share price decline has these shares set up again for a double-digit long-term total annualized return, making this an attractive name to consider again at this price.

 

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Ciena Tripped Up On Supply Chain Challenges, But No Real Change To A Strong Multiyear Story

Ciena Is In A Prime Position To Leverage Robust Data Infrastructure Spending

 

The turn came a little faster than I expected (by a quarter or two), but Ciena’s (CIEN) strong guidance with its fiscal four quarter earnings (reported in early December) confirmed what has been my thesis for some time – that Ciena is the leading optical player and well-placed to leverage strong customer investments in data infrastructure, to say nothing of opportunities to gain share in its core business and leverage new business opportunities.

Ciena shares have given back around half of their post-earnings pop, but are still up more than 20% from the time of my last update. I continue to like these shares, and even with the recent move, I still see a double-digit long-term annualized total return potential from here, and nearer-term potential into the mid-$70’s (if not more).

 

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Ciena Is In A Prime Position To Leverage Robust Data Infrastructure Spending

Ciena Struggling A Bit With Capped Near-Term Upside And Competitive Worries

 

The last couple of months have not been so great for Ciena’s (CIEN) share price performance, and the same is true on a year-to-date basis, as a broad comp group of Cisco (CSCO), Juniper (JNPR), and Nokia (NOK) have noticeably outperformed, while other comps like NeoPhotonics (NPTN) and Infinera (INFN) have had their own struggles.

I believe the main driver of this lagging performance is soft near-term guidance from management that supply constraints are going to prevent the company from shipping to underlying demand. I also believe the prospect of increased competition from coherent pluggables is a concern to some analysts and investors, though I’ve maintained for a while that I think the magnitude of the threat is likely both exaggerated and manageable by Ciena.

The lack of near-term upside is definitely a drawback, but I still like Ciena. Service providers will continue to spend on network expansion/upgrades, and the company continues to make inroads in the enterprise (Webscale) market. The Huawei replacement opportunity is still in place as a driver, as are opportunities to gain share in edge routing. All in all, I still expect mid-single-digit revenue growth and I see double-digit annualized return potential at today’s price.

 

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Ciena Struggling A Bit With Capped Near-Term Upside And Competitive Worries

Ciena Offers Attractive Upside Ahead Of A Reacceleration In Network Spending

 

Optical networking equipment vendor Ciena (NYSE:CIEN) has had a rough go of it over the last year, due in no small part to a slowdown in spending across its customer base (and large service providers like AT&T (NYSE:T) and Verizon (NYSE:VZ) in particular). This sort of cyclicality has long been a part of the model, but always manages to surprise and disappoint the Street when it reappears. Fortunately, Ciena is on the tail end of the slowdown, and looks poised to deliver improving revenue growth and margins over the next couple of years.

Up around 25% since my last update for Seeking Alpha, Ciena has lagged the NASDAQ, as well as other comps like Infinera (NASDAQ:INFN) and Cisco (NASDAQ:CSCO), and suppliers like NeoPhotonics (NYSE:NPTN). I expect revenue to reaccelerate by close to 10% next fiscal year, though, and rise again at a mid-to-high single-digit rate the year after, with around 150bp of operating margin improvement. Longer term, I think Ciena can generate mid-single-digit revenue growth that can support a double-digit annualized return from here.

 

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Ciena Offers Attractive Upside Ahead Of A Reacceleration In Network Spending

TipRanks: Ciena: An Undervalued Play On Near-Term Recovery And Long-Term Growth Potential

It has been a rough period for optical suppliers, as reduced spending from telco service providers like AT&T (T) and Verizon (VZ) has led to weaker demand for Ciena (CIEN), as well as peers and rivals like Cisco (CSCO), Infinera (INFN), and Juniper (JNPR).

That said, Ciena has likely seen the worst of this cyclical slowdown, as book-to-bill has climbed back above 1.0 and orders should translate to stronger revenue in the second half of the year. Beyond the near-term recovery, there are also opportunities for Ciena to displace Huawei with European and Asian customers and gain market share in new metro/edge applications.

Bearing this in mind, Ciena should trade closer to $62 today, with longer-term annual return potential in the high single-digits to low double-digits as the company executes on market expansion opportunities.

 

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Ciena: An Undervalued Play On Near-Term Recovery And Long-Term Growth Potential

 

(Exclusive) Ciena About To Pivot From Recovery To Growth

In terms of reported reports, Ciena (CIEN) isn’t out of the woods yet with respect to the carrier sending slowdown that management announced back in early September 2020, hammering the stock. Still, Wall Street is a forward-looking place, and with the downturn likely ending in FQ2’21 and grow resuming thereafter, I still there are solid reasons for owning Ciena shares.

When I last wrote on Ciena, my conclusion was that the share price weakness following a very negative revision to short-term guidance was a buying opportunity given the meaningful long-term opportunities for Ciena to leverage data traffic growth into higher revenues, margins, and profits.

Since then, the shares have risen about 25%, modestly outperforming the NASDAQ index and its peer group, and regaining much of the ground lost after the September warning. Even with those gains, I believe Ciena shares can continue to outperform on the basis of rebounding spending among Tier 1 North American customers and significant international opportunities.

 

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(Exclusive) Ciena About To Pivot From Recovery To Growth

Ciena's Optical Business Takes A Poke To The Eye From Service Providers

“Buy the dip!”

Great advice, right? There’s just one problem – by and large, those “dips” don’t just come out of the blue. For a popular stock with an attractive underlying business, a meaningful selloff requires something that scares the Street, and usually what scares the Street will scare individual investors too.

Ciena’s (CIEN) significant reduction in guidance for the next quarter, and warning that the weakness would likely persist for a few quarters, was indeed scary, but I don’t think it changes the long-term outlook all that much. I think Ciena’s recent success likely attracted investors who weren’t as familiar with the business, and probably lulled more experienced investors into complacency, but the volatility from service provider accounts that Ciena cited is, historically, really not that unusual.

I don’t want to underplay the risk that Ciena’s guidance could still need to be revised further, and I won’t ignore the fact that the Street is a “what are you doing for me today?!?!” world where weaker near-term relative performance can be punished harshly. Still, I think the core of this business is strong, the growth drivers are still place, and the shares are now undervalued.

 

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Ciena's Optical Business Takes A Poke To The Eye From Service Providers

An Ongoing Divergence Between Ciena's Business And The Stock Sentiment Offers An Opportunity

Ciena (NYSE:CIEN) is doing its part. This optical equipment specialist has continued to more than hold its own in its traditional service provider networking market, while also executing well on its opportunities in the data center with webscale customers like Amazon (NASDAQ:AMZN) and Facebook (NASDAQ:FB). What’s more, Ciena has shown it can move the ball forward with respect to technology, staking out a lead with its 400G technology and, now, its 800G technology as well.

And yet, the shares still don’t really reflect that, or at least not on a consistent basis. Ciena shares had drifted back toward $35 before reporting fiscal fourth quarter results (and more encouraging guidance than the Street had expected), but even in the low $40’s, the shares look underpriced based on what investors have normally paid for similar levels of margin. Although 2020 will see a slower pace for the company, I still think these shares are worth serious consideration.

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An Ongoing Divergence Between Ciena's Business And The Stock Sentiment Offers An Opportunity

Ciena's Story Is Steadily Improving, But The Stock Hasn't Been So Steady

I’ve written more than once that Ciena (CIEN) shares often give investors “second chances” and that there are fairly frequent gaps between the company’s performance and near-term sentiment. And here we are again – while the company beat expectations in the fiscal third quarter and continues to gain share, the combination of concerns about global spending and management’s “failure” to raise guidance has the shares down about 13% relative to my last update.

I’ve written before that I like the idea of buying Ciena shares below $40, and as of this writing, that’s where we are, so this is a name that is very high on my prospective buy list. Yes, I am concerned about the potential of slower datacenter spending, as well as lumpiness in service provider deployments, but I’m willing to accept that risk given the share gain, market growth, and margin improvement offsets. Ciena certainly wouldn’t be immune to a broader market sell-off (particularly a tech-led sell-off), but again that’s a risk that I’m willing to accept on balance.

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Ciena's Story Is Steadily Improving, But The Stock Hasn't Been So Steady

Ciena Doing Great In North America; Europe Remains An Opportunity

Between strong deployments from Tier 1 and Tier 2 service providers in North America and healthier trends among enterprise customers than seen by chip companies like Xilinx (XLNX) and Intel (INTC), Ciena (CIEN) had a great fiscal second quarter. Better yet, between a strong competitive position at 800G, ongoing growth in segments like submarine deployments, and opportunities to gain share in Europe, I don’t believe Ciena has exhausted its growth potential.

I’ve been generally bullish on Ciena for a while now, and there are at least some metrics by which the shares are still undervalued. I like to buy stocks like Ciena when they slip below my long-term DCF-based fair value (which is now near $40), and Ciena has been volatile enough that I don’t think it’s entirely unreasonable to think there will be more “buy on a pullback” opportunities. Still, management is executing well on its opportunities, leading to share gains and improving margins.

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Ciena Doing Great In North America; Europe Remains An Opportunity

Ciena Executing Well On Growing Opportunities In Telco And Data Centers

Ciena (CIEN) has been one of my preferred names whenever Wall Street skepticism starts ramping up and undermining the price, and the shares have chopped their way almost 50% higher over the past year and 70% over the past two years, handily outperforming rivals like Acacia (ACIA), Infinera (INFN), and Nokia (NOK) over those time periods. While I do think the valuation today is more demanding, or at least more reflective of Ciena’s strong execution and growing end-market opportunities, the share price isn’t unreasonable and this is absolutely a name to consider on pullbacks.

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Ciena Executing Well On Growing Opportunities In Telco And Data Centers

Ciena Doing Its Part To Ease The Street's Concerns About The Growth Story

A handful of “surely the good times can’t last” downgrades pressured Ciena’s (CIEN) share price in late September, but the stock has since come back on renewed confidence that those good times actually can last a bit longer, as Ciena continues to gain share in optical systems and gain traction with its new offerings. Moreover, if the software business really is on a better growth trajectory, it will answer some of the concerns about that business and offer another driver of growth over the next couple of years.

The set-up going into 2019 isn’t perfect. Obviously the markets are jittery. On a more company-specific basis, there’s still some risk of disruption from new product introductions from Acacia (ACIA) and Infinera (INFN), as well as risks from service provider budget priorities and a possible slowdown in datacenter growth. Those risks don’t really faze me on a mid-term basis, but could create some choppiness on a month-to-month or quarter-to-quarter basis. Ciena sits toward the low end of my upwardly-revised fair value range, and I’d consider prices in the low $30’s (or below) to be solid buying opportunities for a company with good ongoing leverage to both service provider and datacenter spending.

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Ciena Doing Its Part To Ease The Street's Concerns About The Growth Story

Ciena Sliding A Bit As The Sell-Side Rebuilds The Wall Of Worry

Ciena (CIEN) has been on a roll. Revenue rose 12% in the fiscal third quarter (beating expectations by 3%), gross margin was stronger than expected, and the company has been on a multiyear market-share-building run in both its core WDM market and in webscale. All of that has fueled a market-beating 33% run in the stock over the past year, so of course now some eager beavers on the sell-side are trying to beat the rush and downgrade early.

Wait, what?

It’s not all that uncommon to see calls that otherwise might look bold come out around this time, as there’s not much else to talk about in the weeks before third quarter earnings, and there are some near-term drivers that could weigh on Ciena’s growth. How management sets expectations coming out of this next quarter will clearly be important, as the run in the shares has somewhat emptied the tank for positive drivers.

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Ciena Sliding A Bit As The Sell-Side Rebuilds The Wall Of Worry

Ciena Converting Skeptics And Finding Its Groove

Ciena (CIEN) has been a patience-testing call at times, as the market has been unwilling to trust this optical equipment provider given a not-so-great history and reputation for its sector. While there are still too many subscale players in optical transport, Ciena is doing well on Tier 1 metro spending, growth overseas in markets like India and Japan, and data center growth. Margins are still a bit of a sensitive subject, but I think management has made a good case for why margins should rebound over time.

With the big post-earnings jump (up more than 10%), it's harder to call Ciena a bargain, though I don't think the upside is tapped out yet. I'm a little concerned that Ciena could disappoint on gross margins in the next quarter and shake some of this newly-won confidence, but this is definitely a name I'd look at again if it were to slide back into the mid-$20s.

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Ciena Converting Skeptics And Finding Its Groove

Ciena's Business Should Ramp From Here

Recommending purchasing Ciena (CIEN) when it trades into the low $20s and then lightening up in the mid-to-high $20s has worked relatively well for a little while now, but I’m starting to wonder if Ciena may be about to take that next step where the mid-$20s become the “new low $20s” and where the Street has more confidence in the growth outlook for the company’s converged packet business, as well as more confidence that margins will recover in the coming quarters.

Although there’s a lot left to prove, Ciena has taken some good initial steps towards demonstrating that it has an attractive business outside of Verizon (VZ) and AT&T (T), including data center, tier-2 communications, cable, and non-US customers.

I don’t think these shares are dramatically undervalued, but I think a double-digit annualized return is possible from here (even if just barely double digit). I would note, though, that I’m not giving the company full credit for management’s mid-term growth and margin targets; if the near-term performance justifies more faith in that vision/projection, there would be additional upside.

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Ciena's Business Should Ramp From Here

The Ciena Roller Coaster Is Back In The Buy Zone

I’ve warned before that Ciena (CIEN) really isn’t a great buy-and-hold stock (unless you have a lot of patience…), and the past few months have backed that up. While the shares did well after my last write-up and a strong second quarter, the shares started to weaken in July with growing concerns about the near-term growth outlook pushing the stock back below $20 for a time.

The outlook for optical in 2018 is not particularly strong, with expectations for basically no growth in long-haul and concerns in metro that Verizon (VZ) spending has already peaked. While Ciena still has some company-specific drivers like its datacenter interconnect business, its new WaveLogic Ai chipset, and its growing software business, this company has long struggled to regain credibility from the Street and confidence in management’s long-term goals for revenue and margins.

With the shares back down in the low $20’s, I’m more bullish on Ciena. I believe you have to be careful with cyclical stories (and the 100G rollout is a cyclical driver), but I believe Ciena has taken a lot of smart steps to improve and expand its business, and I believe long-term revenue growth in the 4% to 5% range is attainable, supporting a double-digit FCF growth rate and a mid-$20’s fair value if management can generate modest margin improvement from here.

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The Ciena Roller Coaster Is Back In The Buy Zone

Ciena Continuing To Execute Well In A Growing, And Perhaps Changing, Optical Market

Ciena (NASDAQ:CIEN) has done alright since I last wrote about the stock, with the shares up around 8% versus a 10% gain in the S&P 500, a 9% gain in Nokia (NYSE:NOK), and a slight decline in Infinera (NASDAQ:INFN), but this optical player remains a controversial and volatile name. Nobody seems to dispute that Ciena today is a stronger company both financially and competitively than it has been in a long, long time (if not ever), but some analysts and investors are still reluctant to trust that the optical equipment market has really changed and that these good times can last.

I hate "it's different this time" stories because in the vast majority of cases, it really isn't different, and investors go away with singed eyebrows. That said, telco metro deployments seem less lumpy than in past cycles, and the industry has benefited from consolidation. What's more, data center interconnect is a meaningful growth opportunity, and traffic growth seems well-supported by growing use of streaming services and increased fiber-to-the-home deployments.

Given the trends in both telco and non-telco spending, I don't think my long-term revenue forecast of 5% for Ciena is ridiculous or even all that ambitious, though I do have some concerns that the actual "flight path" along that trend line will be choppy. I'm a little more nervous about modeling double-digit FCF margins on a sustained basis, but Ciena management does seem to have the company in better shape. All told, if Cisco can, in fact, deliver 10% long-term FCF growth, a fair value in the mid-$20s is reasonable, and the shares hold some appeal here.

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Ciena Continuing To Execute Well In A Growing, And Perhaps Changing, Optical Market