Ciena's Double Connection

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By LouAnn Lofton (TMF Lou2)
December 14, 2000

Ciena Corporation

Ticker: (Nasdaq: CIEN)
Phone: (410) 865-8500
Price (12/13/00): $104.63

How Did It Double?

Fiber optics. Glass. Optical networking. Dense wavelength division multiplexing. Photons versus electrons. Light. What in the Sam Hill does any of this mean and why does it matter?

It matters, Fool, because the future doesn't hold a scenario where fewer people will want to communicate less. The trend isn't one of your friends and neighbors transforming into Luddites. Quite the contrary -- more people will want more stuff over voice and data lines and they'll want it even faster than they do now. How can you, as an investor, hop aboard this growth?

One company benefiting from the explosive growth and demand for fattened pipes and more bandwidth is Ciena (Nasdaq: CIEN), whose shares are up from $22.69 to its recent $104 level. Yes, that is in just this year.

Ciena makes products for optical networks. What this basically means is that phone companies and Internet service providers go to Ciena for things that help their networks handle more data without having to build more capacity. Ciena's products help widen the existing capacity of networks.

(I won't go into all the technicalities of fiber optics here. If you want to know more on the ins and outs of fiber optics and all that jazz, you can visit the All About Fiber Optics article in our Telecom & Networking InDepth News area. Also, check out Industry Focus 2001, in which one of the industries we cover is Optical Networking Components.)

Ciena's rise is related to excitement over the current and future prospects for optical networking component and equipment makers. Specifically, the outlook for Ciena looks bright. The company's most recently completed quarter, its fourth, painted a picture of a strong and well-positioned company.

The company has addressed concerns over its dependence on its three largest customers, and that dependence is shrinking. It has a roster of 42 total clients now. Ciena also raised revenue and earnings projections for its next fiscal year, shrugging off the "carrier capital spending" pests that have bothered other equipment providers.

Business Description

Ciena makes equipment for optical networks. The company's products are used by telecommunications companies and Internet service providers to help widen capacity for voice and data.

Ciena was the pioneer in the development of dense wavelength division multiplexing (DWDM). Many wondered if the company had a future in 1998 when a merger with Tellabs (Nasdaq: TLAB) fell apart, and its stock dropped to $4 a share. It made a comeback, though, and is now a leader in optical networking equipment.

Financial Facts

Income Statement*
12-month sales: $858.8 million
12-month income: $98.4 million
12-month EPS: $0.33
Profit Margin: 11.4%
Market Cap: $31,357.6 million

Balance Sheet
Cash: $143.2 million
Current Assets: $813 million
Current Liabilities: $173.3 million
Long-term Debt: $4.9 million

Price-to-earnings: 317
Price-to-sales: 36.5

*Numbers are pro forma

How Could You Have Found This Double?

If you were aware of trends in networking and communications this year, you would have undoubtedly uncovered Ciena. Ciena is a leader in its field, and from all accounts, Ciena's market possibilities are expanding.

Even as other optical networking related companies were falling apart recently on concerns that their customers' spending was drying up -- and therefore the companies' revenues, Ciena's outlook remained firm. The company has a big client list, and three main products. It recently signed a deal with Korea Telecom, and also signed deals with Genuity (Nasdaq: GENU) and Broadwing (NYSE: BRW).

Where to From Here?

The market for Ciena's products is predicted to continue to grow rapidly. According to telecom market research firm RHK, the market will grow to $45 billion in sales for optical equipment makers by 2004. Ciena is poised to profit from this growth.

Ciena does face competition, though, from the likes of Nortel Networks (NYSE: NT), Corvis (Nasdaq: CORV), Sycamore (Nasdaq: SCMR), and even Cisco Systems (Nasdaq: CSCO). With all the money to be made from optical networking in the future, it will be a tough battlefield.

A more short-term concern for Ciena is one of valuation. The company is currently trading at a P/E of close to 317. While certainly the company has a lot of promise, many will wonder if it has this much promise. It's a pretty expensive company at the current levels. Whether or not Ciena can fulfill all the expectations built into its steep price remains to be seen. So far, though, the company continues to execute well.

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