Share prices of Ciena (CIEN -2.66%) plunged nearly 13% in a single day (June 5) following the release of the company's fiscal 2025 second-quarter results (for the three months ended May 3). The steep drop seemed a tad harsh, as its numbers were quite solid. Ciena reported healthy growth in its revenue and earnings, fueled by the artificial intelligence (AI)-powered demand for the company's optical networking components. Management also offered better-than-expected revenue guidance for the current quarter.
The post-earnings plunge offers Ciena investors (and potential investors) an opportunity to buy shares of this fast-growing fiber-optics company. Let's look at the reasons why buying Ciena stock right now could turn out to be a smart long-term move.
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Ciena's AI-powered growth is here to stay
Ciena's fiscal Q2 revenue jumped 24% year over year, while its earnings jumped at an even more impressive rate of 55%. Sales of the company's optical networking products jumped 38% year over year to $774 million, accounting for almost 70% of its top line.
Ciena management remarked on the latest earnings conference call that three of its top five customers were cloud providers, and "their sustained investments in AI infrastructure and network expansion" were a key reason behind the company's healthy growth. That's not surprising, as AI workloads in data centers have created the need for high-speed data transmission, and the fiber optics components Ciena sells allow its customers to reduce latency and increase bandwidth and speed.
This explains why Ciena sees AI as its next big growth driver over the next four years, creating a total addressable market worth $26 billion by 2028. The good part is that Ciena is pulling the right strings to make the most of its addressable market. The new orders received by Ciena last quarter significantly exceeded its revenue. Management estimates that its orders from cloud service providers will double in fiscal 2025 on the back of AI-fueled demand.
That can be attributed to the new business that Ciena is scoring in the cloud AI market to connect graphics processing unit (GPU) clusters with its optical networking equipment. It expects to start recognizing revenue from two such new contracts later this fiscal year, which will ramp higher into fiscal 2026.
As such, it is easy to see why Ciena upgraded its guidance for the current fiscal year. The company now expects its fiscal 2025 revenue to increase by 14%, up from the earlier range of 8% to 11%. However, there is a good chance Ciena will grow at an even better pace in the current fiscal year and beyond, as global AI data center capacity is expected to grow at an annual rate of 33% through 2030, according to McKinsey.
That's why analysts also raised their revenue estimates for Ciena for the next three fiscal years.
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Healthy earnings growth could pave the way for an impressive jump in the stock
Analysts expect a 24% increase in Ciena's earnings this year to $2.26 per share. That's expected to be followed by even stronger growth over the next couple of fiscal years.
Data by YCharts.
Ciena management pointed out on the recent earnings conference call that it expects costs to decline in the future, leading to an improvement in its margins. It expects to put its gross margin in the mid-40% range in a couple of years, which would be an improvement over the lower end of the 42% to 44% range it forecast for fiscal 2025.
So a combination of robust revenue growth and an improvement in margins should build the company's earnings power and help it achieve the solid bottom-line jump that consensus estimates predict. Assuming Ciena's earnings indeed hit $4.31 per share after a couple of fiscal years and it trades at 27 times earnings at that time (in line with its forward earnings multiple), its stock price could hit $118.
That would be a 64% jump from current levels, suggesting that this AI stock is capable of making investors richer. Given that Ciena's forward earnings multiple is lower than the tech-laden Nasdaq-100 index's forward earnings multiple of 28 (using the index as a proxy for tech stocks), buying this stock seems like a no-brainer, considering its earnings growth potential and valuation.
