CIEN - Ciena's Large Legacy Business Weighing On Near-Term Growth And Sentiment
2024-04-05 12:58:10 ET
Summary
- A sharp cyclical slowdown in service provider spending has driven weak guidance from Ciena and prompted a significant sell-off in the shares.
- Ciena has been gaining share from rivals like Nokia and Huawei among service providers, but this major customer segment is likely to remain soft through 2024.
- Ciena has built a strong business among major cloud providers, and this data center-driven business is now over a third of revenue and poised to grow well in the future.
- AI can be a significant growth driver for Ciena, in both inter-DC and intra-DC connectivity, but it will take a few years to mature.
- Mid-single-digit revenue growth and mid-teens operating margins in FY'25/'26 can support a fair value in the $60s, but weak near-term reported growth is a risk.
One of the persistent challenges for Ciena ( CIEN ) has been putting the issues of its past behind the company. While Ciena’s ghosts may not be on a Scrooge-like scale, the fact remains that investors have previously approached this stock with some caution to the boom-bust nature of optical equipment demand among service providers like AT&T ( T ) and Verizon ( VZ ) and the challenges that has created for consistent margin and free cash flow generation. I argue that Ciena’s progress and leverage to new opportunities like cloud computing has gone underappreciated, but the reality is that the company’s significant leverage to service provider spending is still an issue in the here and now. Weak guidance with FQ1’24 earnings (a mid-single-digit year-over-year revenue decline, and weaker margin leverage) hit the stock hard, leading to a roughly 25% decline from its pre-earnings high and a roughly 5% decline since my last update ....
Ciena's Large Legacy Business Weighing On Near-Term Growth And Sentiment