What happened
Shares of communications equipment company Ciena (CIEN -0.48%) tumbled 10.2% through 11:55 a.m. ET on Tuesday morning, despite easily beating expectations for fiscal second-quarter earnings.
Heading into the quarter ended April 29, analysts had forecast Ciena would earn only $0.61 per share (adjusted for one-time items) on sales of $1.09 billion. In fact, Ciena earned $0.74 per share on sales of $1.13 billion -- thus beating expectations on both the top and bottom lines. Actual earnings as calculated according to generally accepted accounting principles (GAAP) were only $0.38 per share.
So what
But if Ciena's results beat analyst estimates then why are the shares down so sharply this morning? Generally speaking, when an earnings beat results in a stock sell-off, the reason is that guidance disappointed -- and indeed, that appears to be the case here as well.
Although CEO Gary Smith characterized Ciena's Q2 results as "outstanding" and predicted that Ciena will continue to take market share going forward, Ciena guided to $1 billion to $1.08 billion in third-quarter revenue -- less than the $1.1 billion that Wall Street was expecting. Management furthermore said that full year-sales will be up only 18% to 22%, lowering the floor on its previous guidance range of 20% to 22%.
Now what
Does lowering the floor on guidance justify investors' slashing Ciena's stock price so drastically today?
On the one hand, it seems a bit of an overreaction. Even the midpoint of the company's new guidance leaves Ciena growing at a very respectable 20% clip -- and if it does that, Ciena should easily hit Wall Street's forecast for $4.35 billion in fiscal 2023 revenue.
On the other hand, though, this is still a $6.3 billion company, with more debt than cash on its balance sheet, that trades for more than 31 times trailing earnings, and that's been burning cash for the last 18 months. Given the priciness of the stock, I'd say that there wasn't a whole lot of room for error in Ciena's report today.
Perhaps the reduction in guidance was simply the excuse investors were looking for to sell a richly priced stock?
