Up 35% in 3 Months, This Tech Inventory Might Turn out to be the Subsequent Huge Synthetic Intelligence (AI) Play
Optical networking firm Ciena (NYSE: CIEN) is probably not a family identify within the know-how sector, however the inventory has been in red-hot kind available on the market over the previous three months, clocking spectacular positive aspects of 35% as of this writing.
Nevertheless, a more in-depth take a look at the corporate’s current monetary efficiency makes this current rally appear shocking. Ciena’s income and earnings fell within the third quarter of fiscal 2024 (for the three months ended July 27). However buyers appear to be upbeat concerning the potential turnaround in Ciena’s fortunes due to a rebound in telecommunications spending, in addition to the rising adoption of synthetic intelligence (AI).
Here is a more in-depth take a look at the the explanation why Ciena may grow to be a beneficiary of the proliferation of AI and maintain its newly discovered inventory market momentum.
The worst appears to be over for Ciena
Ciena’s income in fiscal Q3 fell 12% 12 months over 12 months to $942 million, whereas non-GAAP (adjusted) internet earnings dropped 41% from the prior-year interval to $0.35 per share. These sharp declines had been on account of the poor efficiency of the corporate’s networking enterprise. Extra particularly, Ciena’s optical networking income fell 15% from the identical interval final 12 months, whereas routing and switching income was down by 27%.
Ciena has been hit onerous by the downturn within the telecom tools market that started within the second half of 2023. Based on market analysis agency Dell’Oro Group, international telecom spending fell by 17% within the first half of 2024. The decline in spending negatively impacted Ciena’s order e-book and the surplus stock that the corporate was left with has been weighing on its margins.
Dell’Oro estimates that telecom spending in 2024 may decline between 8% to 10%, up from the 4% drop seen final 12 months. Nevertheless, Citigroup factors out that the situation is bettering within the North American telecommunications area, with spending anticipated to extend by 3% in 2025, in comparison with an an identical decline estimated for 2024.
The great half is that Ciena is already witnessing an enchancment in enterprise situations. The corporate reported a wholesome order influx in fiscal Q3, ending the quarter with a book-to-bill ratio of greater than 1, which signifies that it obtained extra orders than it shipped through the quarter. A studying of greater than 1 is an indicator of robust demand for the corporate’s choices.
Even higher, Ciena’s stock got here all the way down to $937 million final quarter from $1.2 billion in the identical quarter final 12 months. These optimistic developments point out why Ciena’s outlook for the present quarter factors towards an enchancment within the firm’s top- and bottom-line efficiency. The corporate is forecasting income of $1.1 billion within the present quarter on the midpoint, together with an adjusted gross margin of low to mid-40%.
The highest-line steerage factors towards a flat year-over-year efficiency, which might be a giant enchancment over the double-digit decline it reported within the earlier quarter. Moreover, the gross margin forecast means that the bottom-line erosion is prone to decelerate, as Ciena reported an adjusted gross margin of 43.7% within the fourth quarter of fiscal 2023.
In the meantime, Ciena administration and sure Wall Avenue analysts imagine that the fast adoption of AI is probably going to provide its addressable market and progress a pleasant enhance sooner or later.
The necessity for sooner connectivity in AI information facilities needs to be a tailwind for Ciena
Morgan Stanley and Jefferies not too long ago elevated their worth targets on Ciena inventory citing the potential affect of AI on its enterprise. Whereas Morgan Stanley hiked its worth goal to $63 from $60, Jefferies has grow to be extra bullish on the inventory with a worth goal of $80, in comparison with $65 earlier.
Jefferies factors out that the potential leap in demand for sooner connectivity between information facilities to assist the expansion in AI workloads presents a strong progress alternative for Ciena. Morgan Stanley has the same stance, believing Ciena may clock a sooner progress fee sooner or later due to the rising demand for information middle interconnect (DCI) know-how.
The funding banks have grow to be extra bullish about Ciena’s AI-related prospects following a current presentation from the corporate through which it identified that international information middle bandwidth is about to leap greater than fourfold between 2023 and 2027. Because of this, Ciena administration believes that the demand for optical bandwidth may enhance at the next tempo than the historic annual common of 25% to 30%.
The great half is that Ciena is already witnessing a optimistic affect on its enterprise due to AI adoption. As administration identified on the newest earnings convention name, “In Q3, we secured new wins with main cloud supplier clients, spanning terrestrial, submarine and coherent pluggable functions, the bulk pushed by preparations for the anticipated progress in AI and cloud site visitors.”
Dell’Oro Group estimates that the spending on back-end networks for connecting information facilities to one another may double within the subsequent 5 years, hitting $80 billion in annual income. So, do not be shocked to see an acceleration in Ciena’s progress sooner or later; that is precisely what analysts expect from the corporate.
Ciena’s backside line stood at $2.72 per share in fiscal 2023. That determine is about to drop this 12 months, because the chart above reveals. Nevertheless, the corporate’s earnings are set to extend at a formidable tempo over the following couple of years.
Assuming Ciena does hit $3.39 per share in earnings in fiscal 2026 and trades at 25 occasions earnings at the moment (consistent with its ahead price-to-earnings ratio), its inventory worth may hit $85 in a few years. That may be a 25% leap from present ranges. But when the market decides to reward it with the next earnings a number of and the corporate manages to clock stronger earnings progress due to its bettering addressable market, do not be shocked to see Ciena delivering stronger positive aspects.
Buyers seeking to purchase a possible AI winner can contemplate shopping for Ciena, which is buying and selling at a horny 2.5 occasions gross sales and 25 occasions ahead earnings, and whose bull run appears poised to proceed.
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Citigroup is an promoting associate of The Ascent, a Motley Idiot firm. Harsh Chauhan has no place in any of the shares talked about. The Motley Idiot has positions in and recommends Jefferies Monetary Group. The Motley Idiot has a disclosure policy.
Up 35% in 3 Months, This Tech Stock Could Become the Next Big Artificial Intelligence (AI) Play was initially printed by The Motley Idiot
