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Buy This Hot Networking Stock Before It Soars Higher

By Harsh Chauhan - Updated Jun 8, 2021 at 4:32PM

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A recovery in network spending has triggered a turnaround at this company and supercharged its shares.

Shares of Ciena (CIEN -1.03%) were languishing at the end of last month, but they have become red hot in the wake of the company's better-than-expected fiscal Q2 earnings report and management's confidence about an improving business outlook.

CIEN Chart

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The optical-networking components supplier has struggled over the past year as the novel coronavirus pandemic throttled telecom spending and reduced orders meaningfully. However, it looks like Ciena's days of struggling are almost over. Let's see why.

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Things are looking up for Ciena

Ciena's revenue fell 6.7% year-over-year last quarter to $833.9 million, while adjusted earnings fell to $0.62 per share from $0.76 per share in the prior-year period. The results easily topped Wall Street's expectations, as analysts were looking for just $0.48 per share in earnings on revenue of $829 million.

Of course, the year-over-year contraction in revenue and earnings seems like a red flag at first, but there are several signs of a turnaround at Ciena. For instance, Ciena's revenue increased 10% quarter-over-quarter. The company also delivered a gross margin of 49.5% for the quarter, an increase of 3.3 percentage points over the year-ago period. The operating margin jumped 1.7 percentage points to 16%.

An improved product mix, higher contribution from the software business, and new capacity additions by Ciena's customers boosted its margins during the quarter. For instance, Ciena's revenue from its software and services businesses increased from 6.7% of the total revenue in the prior-year period to 9.7% of the total revenue last quarter. More importantly, Ciena's revenue from software and services increased an impressive 34% year-over-year to $80.6 million.

However, it was the company's outlook that sent investors into a celebratory mood. Ciena anticipates $950 million to $980 million in revenue this quarter, the midpoint of which would be nearly flat compared to the year-ago period. So Ciena could return to year-over-year revenue growth this quarter if it manages to hit the higher end of its guidance range. The good part is that Ciena may be able to do just that, as the uptick in order activity suggests.

The growth engines are warming up

Ciena management pointed out on the latest earnings conference call that the company is witnessing a sharp uptick in orders in the wake of a strong recovery in the business environment. The company's order value in the second quarter was higher than the revenue it generated. Its backlog increased both year-over-year and quarter-over-quarter.

Ciena CEO Gary Smith said:

I am pleased to report that during Q2, we began to see material amelioration of the operational and fiscal caution of key service provider customers around the world. And we believe that this is translating into a more normalized approach to network investments and operations, including more focus on new architecture builds and deployments.

Meanwhile, CFO James Moylan added that "second-quarter order flow indicates a return to spending by our service provider customers." The company is now confident of delivering a strong second-half performance, and it expects to exceed its profit target for the year on the back of a stronger margin profile.

Analysts expect Ciena to step on the gas in a big way in the second half of 2021. The company's revenue is expected to jump nearly 27% year-over-year in fiscal Q4, ending in October, while earnings per share could jump more than 50% year-over-year to $0.93. What's more, Ciena's top-line growth is expected to accelerate into the next fiscal year, and its earnings are expected to jump in the mid-teens.

All of this isn't surprising: Ciena's products and solutions are witnessing robust demand thanks to the buildout of 5G networks and data centers, as well as network capacity additions to support the data boom. For instance, Ciena scored 16 new wins for its high-speed optical transport solutions such as the WaveLogic 5 Extreme, and shipped 5,000 of its WaveLogic 5e modems during the quarter. Demand for the company's Blue Planet automation software also remained strong, with the company witnessing "the largest order quarter-to-date and four new portfolio wins with major service providers."

These tailwinds explain why Ciena's stock has stepped on the gas since the company released its latest quarterly report. And the company's newly found momentum is here to stay amid a rebound in network spending. As such, investors looking to add a growth stock to their portfolios should take a hard look at Ciena before it jumps higher, especially considering that it is trading at less than 19 times forward earnings.

Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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