Ciena Is Down, but Not Out

Ciena has struggled this year, but it can get better in the future.

Apr 14, 2014 at 4:00PM

Networking company Ciena (NYSE:CIEN) is having a terrible time this year with the company's stock down close to 20%. The company has been hurt by the recent sell-off in technology stocks. Ciena's financial performance has remained strong, however. Moreover, since the company has solid clients such as AT&T (NYSE:T) and recently inked a partnership with Ericsson (NASDAQ:ERIC), it could continue to perform well in the future.

Looking beyond the drop
In the last quarter, Ciena's revenue increased 18% from last year, in line with analysts' expectations. The company earned $0.13 per share and handsomely beat analyst expectations of $0.07 per share. Going forward, Ciena is working to improve its profitability and market share with the growing demand for converged and programmable networks. It is also seeing strong opportunity in software-defined networking.

The company is focusing on the rollout of Metro services. Along with AT&T, Ciena has made about 6,500 deployments in Metro services. Ciena's relationship with AT&T runs very deep and Metro is just one of the various areas both companies are working upon. The company is also the domain supplier to AT&T for its optical transport network (OTN) and core transport domains. The telecom carrier has been deploying OTN for quite some time now, shifting its focus away from legacy services. 

Through its $14 billion Project VIP, AT&T has been aggressively updating its networks to make them faster. This means that the company should continue seeing strong business from AT&T in the future.

A strategic partnership
In February, Ciena announced that it has struck a strategic global agreement with Ericsson for the joint development of IP-optical convergence. Under this agreement, Ericsson will offer Ciena's Converged Packet Optical portfolio, including the 6500 Packet-Optical Platform and 5400 family.

As a result, Ciena expects multi-year opportunities in optical convergence that will be driven by Ericsson's expected growth in markets across the world. Ericsson is the world's biggest maker of mobile networks and it is seeing a pick-up in demand in Europe and China. Ericsson management believes that the company has won market share in Europe and that the rollout of 4G LTE in markets such as China should accelerate its growth in the future.

Moreover, Ciena's Ericsson partnership should enable the company to increase its market by expanding and transforming customer networks by delivering a broader set of infrastructure solutions. As customers are migrating to new converged network architectures, this looks like a possibility.

In addition, Ciena's WaveLogic coherent optical technology will be integrated into Ericsson's IP portfolio, creating a solution that allows customers to operate routers with Ciena's cutting-edge photonics. Ciena is also seeing opportunities in software-defined networking for converged IP and optical transport. 

More good points
Also, Ciena plans to spend more on research and development going forward in order to explore new opportunities in the networking industry. As a result, Ciena's research and development expenses are expected to rise this year.  The good thing is that despite these investments, Ciena's earnings and revenue are expected to increase this year.

Yahoo! Finance analysts project a 10% growth in Ciena's revenue this fiscal year. In the long run, its earnings are expected to grow at a compounded annual growth rate, or CAGR, of almost 17% for the next five years. The company seems to be on the front foot going forward on the back of its strong customer base. Moreover, the stock looks cheap at a forward P/E ratio of under 15, which makes it a reasonable buy right now.

Bottom line
Despite having a bad time so far this year, Ciena still looks good. The company's revenue and bottom line are getting better and the pipeline looks strong. This is the reason why investors should seriously consider Ciena for their portfolio as the company is struggling right now, but looks good for the long haul.

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Sharda Sharma has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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