Ciena Switches

A stack of Ciena switches. Image source: Ciena.

What: Shares of Ciena (NYSE:CIEN) rose 9.5% on Wednesday, following an upgrade from analyst firm Raymond James.

So what: The maker of high-speed networking equipment is set to report third-quarter results next week, but Raymond James analyst Simon Leopold wanted to make it clear that he wasn't betting on a strong earnings report with this upgrade. Instead, he sees a long-term story playing out over the next several quarters, as Ciena appears to be stealing AT&T (NYSE:T) orders from other long-haul networking specialists.

Now what: Ma Bell is already Ciena's largest customer, accounting for 18.5% of the company's total sales in 2014. AT&T's orders have increased by 71% over the past two years, and if Leopold's thesis is correct, that growth should continue.

Specifically, Raymond James' market checks show Ciena taking AT&T's long-haul and metro area networking business away from Japanese IT hardware giant Fujitsu and privately held Coriant.

Besides healthy trends inside the AT&T account, Leopold also sees Ciena spreading out into new markets, often outside its telco wheelhouse. The analyst also believes that most revenue estimates for the full year are too low, because they don't account for sales stemming from Ciena's recent $415 million acquisition of software-defined networking expert Cyan. Based on all this, Leopold raised his rating on Ciena from "market perform" to "outperform," setting his target price at $27 per share. Getting there would unlock another 21% share value boost and just barely exceed Ciena's 52-week highs.

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

Ciena looks back at a modest net loss during the past four quarters, inspiring short-sellers to grab 22% of the company's float. But Ciena also generated a solid $161 million of free cash flows in the same period. Ciena is healthier than it looks, and can sneak up on the bears when they least suspect it. Ciena has beaten Wall Street's earnings estimates in five of the past six quarters, and often by a wide margin. As a result, the stock has soared 51% higher since last October, and that includes Ciena's more recent price drops.

I see nothing wrong with Leopold's reasoning here. The company may or may not beat estimates in next week's report, but I'd hate to be a short-seller of this stock in the long run.

Anders Bylund has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days.

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