Optical networking equipment supplier Ciena's (CIEN 2.79%) stock price has had a rough 2025, dropping 24% as of this writing. That may surprise some investors at first, considering its financial performance has improved in recent quarters.
The demand for Ciena's optical networking equipment improved thanks to increased demand for fast networking speeds in artificial intelligence (AI) data centers. Countering this demand is overall market negativity around tech stocks related to an ongoing tariff war along with growing concerns about the viability of the huge AI infrastructure investments being made. These factors likely influenced some Ciena investors to book profits from the strong gains the stock clocked in 2024.
NYSE: CIEN
Key Data Points
However, Ciena's pullback provides an opportunity for long-term investors to buy this stock at an attractive valuation, especially considering its improving financial performance because of AI. Here's why buying Ciena stock right now could turn out to be a smart long-term move.
Ciena's turnaround is gaining momentum
Ciena ended fiscal 2024 (ended Nov. 2) with an 8.5% decline in revenue and a 28% drop in its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). However, the company's fiscal 2025 first-quarter results (for the three months ended Feb. 1) make it clear that it is indeed turning around.
Ciena's quarterly revenue jumped 3.3% from the year-ago period, while its adjusted EBITDA dropped just 2.2%. Importantly, Ciena's guidance for the current quarter suggests its growth pace is improving. Management guided for $1.09 billion in revenue for fiscal Q2 (at the midpoint), which would be an impressive jump of 20% from the year-ago period.
Additionally, Ciena expects its adjusted gross margin to land in the low-40% range, which would be almost in line with the year-ago period's reading of 43.5%. So there is a good chance that the company's adjusted EBITDA will improve in the current quarter. Ciena management pointed out on the latest earnings conference call that it saw strong order inflows from cloud service providers thanks to "the rapid expansion and distribution of AI training and inferencing infrastructure."
The company now gets nearly a third of its total revenue from cloud service providers. That number could head higher in the long run on the back of continued investments in AI data center infrastructure, which needs high-speed networking driven by optical components that Ciena sells. Market research firm TrendForce estimates that shipments of optical components such as high-speed transceivers tripled last year, and the figure is expected to grow by another 56% in 2025.
Even better, the optical transceiver market is expected to keep growing at a nice pace in the long run, clocking an annual growth rate of more than 17% through 2029, according to market research firm TechNavio. As such, it won't be surprising to see Ciena's growth picking up the pace in the coming years.
Management expects Ciena's revenue to grow at the high end of its guidance range of 8% to 11% in fiscal 2025. That would be a big improvement over its performance last year. Ciena also expects its non-GAAP (generally accepted accounting principles) gross margin to remain consistent with last year, which should be enough to help the company return to earnings growth from fiscal 2025. For comparison, Ciena's earnings were down 33% in fiscal 2024 to $1.82 per share.
Two simple reasons to buy the stock
We have already seen that Ciena's financial performance is projected to improve from the current fiscal year as its AI-powered catalysts start taking hold. That explains why analysts expect a sharp jump in the company's bottom line from fiscal 2025 following last year's disappointing performance.
Data by YCharts.
What's more, the chart tells us that analysts raised their earnings growth expectations for Ciena for the current and next two fiscal years. This points toward improving confidence in the company's growth prospects. And if the rapid improvement in Ciena's bottom line isn't a solid enough reason for investors to buy the stock, its compelling valuation could convince them to go long.
After all, Ciena stock trades at just 25 times forward earnings. This makes the stock way cheaper than the U.S. technology sector's average price-to-earnings ratio of 42. Buying Ciena at this valuation following its recent pullback seems like the right thing to do, as the remarkable acceleration in Ciena's earnings growth is likely to be rewarded with more upside on the market.
Ciena carries a 12-month price target of $87, per 17 analysts covering this AI stock, pointing toward 37% gains from current levels. There is a good chance that Ciena could indeed hit this target in the coming year and head higher over the long run, making it an ideal buy-on-the-dip candidate for savvy investors.
