Don’t Worry, Ciena Will Bounce Back
Harsh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Communications equipment maker Ciena (NASDAQ: CIEN) “was” one of the best performers on my CAPS page. I had made an Outperform call on the stock after doing my bit of due diligence and checking for signs of a recovery in the company’s business. I felt vindicated and my CAPS rating got a boost when Ciena thumped consensus estimates in the second quarter and its stock went north.
But all of that is now past tense. Ciena posted a wider-than-projected loss in the third quarter and offered a gloomy forecast for the ongoing one. The result – Ciena’s shares lost one-fifth of their value in a single day, giving my CAPS rating a serious dent.
Taking one on the chin
Ciena was on a blazing run so far this year before its third quarter results. The stock had added almost 40% to investors’ wealth, which is astonishing for a communications equipment company. When the clouds of economic uncertainty looms, the telecom companies run for cover and keep their spending tight. This in turn flows down to equipment makers such as Ciena.
While we have seen the likes of Alcatel-Lucent and Ericsson huff and puff in recent times, Ciena’s rise has been gravity defying. Management was mostly positive on the previous conference calls but that gave way to despair this time. In the words of CEO Gary Smith, “In an increasingly difficult macro environment, it has taken longer than expected to operationalize some of our major design wins in North America and internationally.”
So will this be management’s tone for the short term? The answer is maybe. A faltering performance and a depressive outlook have brought down the shares tremendously, and I believe that the bad news is already priced in. But as long-term investors, we need to look at the bright side of things. Ciena has performed decently even in difficult times so far, and its prospects over the long run haven’t changed overnight after a torrid quarter.
Spending is low, but not forever
So what’s happened has happened. At this juncture, it will make more sense to see what could drive Ciena higher over a longer period of time. Firstly, we shouldn’t forget that telecom companies keep their wallets on a tight leash in difficult economic conditions as telecom spending is done over a long period of time. As such, the return on investment takes some time to come back and telcos don’t like to commit too much capital into infrastructure when things don’t appear bright.
But we are not going to live with fears of a slowdown forever, and infrastructure spending will most probably resume but it might take some time. AT&T (NYSE: T), for example, intends to shift its customers to 3G and 4G networks in four years’ time. Hence, AT&T will need to spend on the infrastructure for the faster networks. And it should be noted that AT&T isn’t alone in the 4G race. Other players such as Sprint are also lining up their 4G offerings in order to satisfy the needs of data hungry customers.
While Ciena can’t eke out money from telcos when they don’t plan to spend, it can surely land some more design wins to keep its pipeline strong and reap the benefits when the spending comes back. And Ciena seems to be doing just that. It has seen design wins in North America and globally. In addition, Ciena has started deploying its switches to carriers in North America recently and is the market leader in Ethernet solutions.
Innovation and resilience
Ciena’s innovation is another strong point. The company focuses on introducing more efficient and cost-friendly products, such as the open source architecture which has opened to impressive reviews. This architecture would enable customers to make networks more intelligent, it would enable them to scale up the network economically and enable the entire network to function intelligently along with cloud computing. Ciena expects this architecture to drive its results higher through more design wins, and it has already started seeing adoption of the architecture at various customers globally.
Management knows, and states that the going would be difficult in the near-term but they are focused on winning more contracts and are set to perform above the market. They know that telecom companies will eventually build networks and Ciena is preparing itself to make the most out of it when that time comes through its cutting-edge products.
The takeaway, with a bonus
Thus, from a long-term perspective, Ciena is still a good deal and value-driven investors would probably think of initiating a long position in the stock at its current beaten down price. More importantly, Ciena’s decline has opened up another lucrative play in the telecom sector.
Optical networker JDS Uniphase (NASDAQ: JDSU) fell almost 6% after Ciena’s results, which can be construed as a chance to buy into it since JDS is a leader in fiber optics and looks set to do more in the future. Hence, if you are patient enough and wait out the current economic scenario, both Ciena and JDS might prove to be compelling deals.
TechJunk13 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.