"Looks like it should be a merry Christmas indeed for Ciena shareholders." That's what I said just two days ago. Hey, give a Fool credit for magnitude at least. When I'm wrong, I'm really wrong.

Just more than 24 hours after telecom equipment maker Ciena (NASDAQ:CIEN) reported its fiscal Q4 2007 earnings, shares are down a decidedly un-merry 15%. As it turned out, though, I was half right about the news. Ciena did in fact beat analyst predictions for both sales and earnings, reporting:

  • $216.2 million in revenue (35% better than last year).
  • $0.48 per share in pro forma (Latin for: "Why are we still using pro forma? We're making real profits these days!") profits, $0.06 better than expected and a clean double from last year's Q4 number.
  • $0.30 per share, GAAP -- which was better than double what it earned a year ago.

So what?
That pretty much sums up Mr. Market's reaction to the news.

Sure, the company posted 38% revenue growth. Sure, it racked up 50.5% gross, 12.5% operating, and 10.4% net margins. Sure, those numbers handily beat their counterparts at Nortel (NYSE:NT), Alcatel-Lucent (NYSE:ALU), UTStarcom (NASDAQ:UTSI), and Sycamore Networks (NASDAQ:SCMR), not to mention nearly everyone but Cisco (NASDAQ:CSCO). And sure, the company logged strong, honest-to-goodness profits under commonly accepted accounting math, and seems poised for more.

But Mr. Market seemed to only hear Smith say: "We expect to deliver up to 5% sequential revenue growth in our fiscal first quarter and 20% annual revenue growth in fiscal 2008."

At which point investors promptly did a spit take. "20%?" they protested. "But that's barely half the rate of 2007 growth!"

Precisely
And here's the important point, folks. Ciena churned out $77 million in free cash flow in fiscal 2007, as compared with negative $97.1 million in fiscal 2006. That's super news, but Ciena's stock had already run up too far, too fast in anticipation of this news.

Its stock is still selling for roughly 40 times free cash flow -- which would be an entirely fair price to pay, were Ciena expecting to keep on growing in the neighborhood of 40% per year. But with most analysts agreeing that Ciena will fall short of 20% annual growth over the next half-decade, 40 times free cash flow is too expensive. In other words, as much as yesterday's sell-off (continuing today, by the way) looks like an overreaction, it isn't. This stock has further to fall.

What did we expect out of Ciena last quarter, and what did we get? Find out in:

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Fool contributor Rich Smith does not own shares of any company named above. The Motley Fool has a disclosure policy.