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Why You Should Be Buying This Top Networking Play

By Harsh Chauhan - Mar 15, 2021 at 11:52AM

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This networking company is turning around and trades at an attractive valuation after the recent sell-off.

The broader stock market sell-off dented Ciena's (CIEN 2.00%) stock price momentum last month, blunting the company's promising start to the year just as it appeared to be regaining its mojo after a forgetful 2020.

But investors looking to take advantage of the 5G network rollout and the rapid acceleration in the adoption of various cloud services should take a closer look at this optical networking company. Ciena seems to be on the cusp of a turnaround, it is trading at an attractive valuation, and it may not be long before its stock price starts moving north once again.

Let's see why it may be a good time to load up on Ciena stock.

CIEN Chart

CIEN data by YCharts

Ciena is showing signs of a turnaround

Ciena's fiscal 2021 first-quarter earnings results were better than expected. The optical networking provider's revenue fell 9.1% year over year to $757.1 million for the quarter ending Jan. 30. Wall Street was anticipating a steeper decline in Ciena's revenue to $749.6 million. The company delivered adjusted earnings of $0.52 per share during the quarter, which was flat as compared to the prior-year period.

Analysts expected Ciena's adjusted earnings to shrink to $0.45 per share, but margin improvements and a lower share count helped the company ease past that estimate. More specifically, Ciena's adjusted gross margin increased 2.9 percentage points year over year to 48%, while the adjusted operating margin was up 1.5 percentage points to 14.6%. The company attributes the improved margin profile to lower spending during the quarter.

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Image source: Getty Images.

The results may look like a mixed bag at first given the drop in Ciena's top line and a stagnant bottom-line performance, but investors should note that its business was affected by cautious telecom spending in the aftermath of the novel coronavirus pandemic. Ciena had said in September last year that "pandemic-related challenges would likely persist for a few quarters" on account of tight telecom spending. But the good news is that there are signs of an improvement in business activity, as CEO Gary Smith pointed out on the latest earnings conference call:

However, we are seeing some early encouraging signs of improvement. In fact, orders in Q1 slightly exceeded revenue for the first time since the first half of 2020. These indications are providing us increased confidence in a strong second half performance this year.

For instance, the company scored 14 new customers this quarter for its WaveLogic optical networking platform that allows carriers to increase the capacity and the speed of their networks. Ciena claims that its WaveLogic 5 platform can boost optical fiber capacity by 30% and increase wavelength capacity by 50%. Not surprisingly, 5G networks are expected to use a lot of optical fiber to bring high-speed, low-latency networks to customers.

Mordor Intelligence estimates that the fiber optic cable market could clock a compound annual growth rate of nearly 15% through 2026, indicating that Ciena's business can pick up the pace in the coming years. Gartner also estimates that 5G spending will rebound in 2021. Investments in 5G networks grew at a relatively slower pace of 96% in 2020 after increasing a whopping 576% in 2019.

These tailwinds indicate why analysts expect Ciena to return to top-line growth in the current fiscal year, and step on the gas in the next one with an estimated 8% increase in revenue.

Time to buy

Ciena is trading at an attractive valuation after its recent pullback. The stock's trailing price-to-earnings (P/E) ratio of 24 is well below the five-year average multiple of 44 thanks to a stable earnings performance, while the forward earnings multiple of just 18 points toward a stronger bottom line.

The stock looks like an enticing bet at these multiples, especially considering that its turnaround is in full swing. The company expects $825 million in revenue this quarter at the midpoint of its guidance range, which would be a drop of 7.7% from the year-ago period. This indicates that Ciena's rate of revenue decline can slow down further this quarter.

However, don't be surprised to see the company outpace its own expectations thanks to recent customer wins and the potential uptick in network spending activity. These tailwinds could pave the way for stronger growth in the second half of the year and help Ciena become a growth stock once again.

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Ciena Corporation Stock Quote
Ciena Corporation
CIEN
$50.57 (2.00%) $0.99

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