Ciena's (CIEN 1.78%) year went from bad to worse after the release of its fiscal 2022 first-quarter results on March 7, as the company's numbers weren't as strong as Wall Street was expecting.
Share prices of the optical networking specialist cratered 11% after the results, and the stock has now lost over 22% of its value so far this year. Ciena blamed supply-chain disruptions caused by the spread of the omicron variant of the coronavirus earlier this year, as well as the global chip shortage, for its below-par performance.
Interestingly, the company pointed out that the demand for its networking products remains strong because of the growth in network bandwidth, the faster adoption of cloud computing, and the growth in data traffic.
Image source: Getty Images.
So should investors use Ciena's drop as an opportunity to buy more shares? Let's find out.
A closer look at Ciena's tough quarter
Ciena reported $844.4 million in Q1 revenue, an 11.5% increase over the prior-year period. However, higher costs on account of supply-chain disruptions led to a drop in the company's adjusted earnings. Ciena reported $0.47 per share in earnings for the quarter, down from $0.52 per share in the prior-year period.
It's worth noting that Ciena was originally expecting $890 million in revenue last quarter at the midpoint of its guidance range, but it slashed its expectations on Feb. 15, citing supply-related issues. The company's updated guidance called for $840 million to $850 million in revenue, which means its actual top line was slightly behind the midpoint of the updated range.
The fiscal Q2 guidance turned out to be another problem. Ciena expects $930 million to $970 million in revenue this quarter, while adjusted gross margin is expected to land at 43%. The midpoint of the top-line guidance is below consensus estimates of $961 million, but investors should note that Ciena had recorded $834 million in revenue in the same period last year. So, the company's top line is on track to increase nearly 14% year over year, which would be an acceleration over its Q1 growth.
The bottom line, however, will take a hit, as Ciena's adjusted gross margin stood at 49.2% in the prior-year period. This indicates that the company is expecting a major contraction in its margin profile due to elevated logistics and supply-related costs.
All of this indicates that Ciena is struggling on account of problems beyond its control. But this has opened up an opportunity for savvy investors to buy the stock at a cheap valuation, especially considering that its fortunes could start looking up as the year progresses.
The big picture is still bright
Ciena has maintained its full-year guidance despite the supply-chain challenges. The company expects to achieve 11% to 13% revenue growth in fiscal 2022, with an adjusted gross margin of 43% to 46%.
Ciena is still confident it will hit its annual target is because it expects the supply-chain scenario to improve in the second half of the year. CEO Gary Smith pointed out on the company's latest earnings conference call that Ciena has placed "significant orders with our suppliers to meet our expectations for a strong second half." Additionally, Smith says that more manufacturing capacity is expected to come online later in 2022.
An improvement in the supply-chain situation will allow Ciena to meet the robust demand for its connectivity solutions, which has led to a sharp spike in orders and backlog. The company exited the fiscal first quarter with a book-to-bill ratio of 2.5. A reading of more than 1 suggests that a company is receiving more orders than it can fulfill.
This strong order activity reflects in Ciena's backlog, which stood at more than $3 billion at the end of the previous quarter. That backlog indicates that Ciena is well on its way to hitting its full-year revenue target of $4.06 billion.
What's more, Ciena is operating in a market that seems built for long-term growth. Mordor Intelligence estimates that the optical transport network market could be worth $32 billion in revenue by 2027, as compared to $18 billion in 2021.
As a result, Ciena should continue witnessing strong order inflow going forward thanks to the growing demand for optical network components that are used in building faster networks, such as 5G. That's why investors looking to buy a tech stock on the cheap right now should have Ciena on their watch list, as it is trading at 19 times earnings, which is at a discount to the S&P 500's earnings multiple of 24.
