The wheels have come off Ciena's (NYSE:CIEN) impressive run on the stock market in the past few months thanks to a series of below-par results and concerns about the strength of the market it operates in.
The string of bad news continued when the optical networking company's fiscal 2020 fourth-quarter results failed to match Wall Street's expectations, thanks to the problems that began showing up in the fiscal third quarter. Ciena had said at that time that it was witnessing "a meaningful slowdown in orders" in the wake of the novel coronavirus pandemic -- a trend that continued in the fiscal fourth quarter.
Ciena CEO Gary Smith pointed out on the latest earnings conference call that the company is operating amid challenging market conditions:
[The] combination of a slowing of business velocity and increased risk aversion among many global service providers is adversely impacting the short-term deployments of new architectures and network builds.
This does not bode well for a stock that was crushing the market a few months ago, driven by the rollout of 5G networks that require optical components to deliver fast speeds. Let's take a closer look at Ciena's latest performance, and see if investors should be buying the stock in the hopes of a turnaround.
Ciena goes off the rails but provides some silver linings
Ciena's fiscal fourth-quarter revenue of $828.5 million was down 14.4% over the prior-year period, though it was slightly better than the mid-point of the company's original guidance of $800 million to $840 million. The company's adjusted net income of $0.60 per share was lower than Wall Street's expectations of $0.63 per share, but it improved over the prior-year period's figure of $0.58 per share thanks to stronger margins.
In fact, Ciena's non-GAAP gross margin shot up 5.7 percentage points over the prior-year period to 49.5% during the quarter. This was driven by an increase in software-related sales and bigger purchases from existing customers compared to new ones, the latter of which tend to generate lower margins. However, Ciena management has warned that its gross margin will return to normalized levels between 43% and 45% in the future once the revenue from new businesses returns to normal.
Additionally, Ciena's outlook for the new fiscal year doesn't appear too attractive. The company anticipates revenue growth between 0% and 3% this fiscal year given the prevailing market conditions. It expects the business to pick up in the second half of the fiscal year once customers begin deployments and Ciena's design wins translate into actual revenue.
However, the company's near-term performance will remain under pressure. It expects revenue between $735 million and $765 million this quarter, with the mid-point indicating a drop of nearly 10% over the prior-year period. So the company will have to turn in a much stronger performance in the second half of the fiscal year to hit its full-year guidance.
What should investors do?
It is clear that Ciena is waiting for a turnaround in the optical networking market. That's not surprising, as it controlled nearly a fourth of this space at the end of last year. Ciena could reward patient investors handsomely in the long run -- the global fiber-optic network market is expected to come out of its slump in the coming years because of applications such as the Internet of Things, a spike in the number of connected devices, and the proliferation of fiber networks to homes and buildings.
According to a third-party estimate, the demand for fiber optic cables could grow at a compound annual rate of 12.2% through 2024. This indicates that Ciena can regain its mojo in the long run, which makes it an ideal bet for patient investors considering its attractive valuation. The stock currently has a price-to-earnings (P/E) ratio of 22, which is much lower than the five-year average multiple of nearly 53.
A forward earnings multiple of 18 points toward a stronger bottom-line performance, which Ciena may be able to deliver if the broader market picks up and drives an increase in demand and deployment. Moreover, the company sports a decent balance sheet, with its cash pile of $1.24 billion exceeding the debt of $763 million, which should allow it to navigate the near-term headwinds.
All of this indicates that now may be a good time for value-oriented investors to go long on Ciena stock. The optical networking market is expected to come out of its slump as demand for faster networks grows and lifts Ciena out of mediocrity.