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Cloud Spending Continues To Send Ciena's Stock Skyward

Jun. 09, 2020 7:59 AM ETCiena Corporation (CIEN) StockINFN, IPHI, NOK3 Comments
Stephen Simpson profile picture
Stephen Simpson


  • Ciena saw strong data center growth offset by weaker service provider demand, with significantly better margins on business mix and cost/efficiency improvements.
  • Covid-19 could tap the brakes on data center growth in the second half, but the long-term story remains strong with the 800G ramp just beginning.
  • Ciena looks more fairly valued than undervalued to me now, but execution on share growth opportunities could still generate upside and management is building a good track record.

Not all suppliers to data center customers (particularly hyperscale customers) are benefitting equally, but I’d say on balance that it’s pretty clear that data center spending is still a strong driver for leading vendors like Broadcom (AVGO), Inphi (IPHI), and Ciena (NYSE:CIEN), with the latter’s share price up about 20% from the time of my last article. While Ciena’s performance relative to other optical equipment companies (including Cisco (CSCO), Infinera (INFN), and Nokia (NOK)) hasn’t been the strongest over the past three months, the one-year and two-year comparisons are more favorable, as Ciena has been riding a winning strategy for some time now.

I still believe that many of the key drivers for Ciena are firmly in place – potential share gains from rivals like Huawei and Nokia on the server provider side, ongoing growth in its webscale business, and relatively few meaningful competitors in that cloud/hyperscale market. Valuation is more challenging now; I don’t think Ciena is overpriced here, but I do see sell-siders stretching to validate ever-higher target prices, and I think upside is now tied more to outperforming a higher bar of expectations rather than convincing investors to reconsider Ciena’s positive qualities.

Better Margins Drive A Fiscal Q2 Beat

Ciena’s fiscal second quarter revenue was only a little better than expected, but gross and operating margins were significantly better than expected, beating sell-side estimates by almost four points and five-and-a-half points, respectively. Guidance for the remainder of the year was not necessarily that bullish on the top line, but higher margins are welcome and Ciena is establishing a pretty good reputation for conservative guidance (meaning there could still be some upside).

Revenue rose more than 3% YoY and 7% QoQ in the fiscal second quarter, with software and services outperforming products on a YoY basis (up 14% versus up 1%), while the reverse

This article was written by

Stephen Simpson profile picture
Stephen Simpson is a freelance financial writer and investor.Spent close to 15 years on the Street (sell-side, buy-side, equities, bonds).

Analyst’s Disclosure: I am/we are long AVGO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (3)

puddnhead profile picture
Hey, good to see you back with an update on your outlook @Stephen Simpson, CFA ! I think I'm with you once again, I still like the long term story, but there treacherous undercurrents here, and the water level's much higher than it was a few years back. I recall maybe a year ago I was a bit more bullish than you? But on the flip side (for us both), some other retail investors are FINALLY paying attention too (at least here on SA) and right now retail is really driving some other stocks to head-scratching levels (e.g. NKLA), maybe that will yet happen to CIEN (again). Remember the days (years)when it was only me and sometimes one other guy that commented on your CIEN articles?
Steelhead15 profile picture
Sounds interesting!
CIEN has TTM GAAP earnings of $6.62 and a GAAP PE of only 8.26.

I'm far more bullish on CIEN than Wall Street. CV19 didn't stop CIEN from achieving solid GAAP earnings, revenues and cash flow.

CIEN is flying under the radar. I'm expecting still higher earnings and revenues next quarter and beyond. CIEN has the technology leadership network platforms and equipment. I've already invested in CIEN so you don't have to buy CIEN.
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