This Stock Proves That Myopia Doesn’t Deserve a Place in Investing
Harsh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
If you want to see some real life, zero-turns-hero instances, look no further than the stock markets. Just six months back, analysts were critical of communications equipment maker Ciena (NASDAQ: CIEN), slapping the stock with rating downgrades. Even myopic investors had joined them then, after the stock missed estimates and panic selling shaved 20% off its market capitalization. But, Ciena’s business is such that it would ultimately do well, even though it might witness short-term pain.
Thus, I knew that value investors would have jumped onto the stock after that sell-off in September and they are now sitting on gains of almost 30%. Ciena has made a heroic comeback since, outsmarting the army of analysts who were expecting it to post a loss in the recently-reported first quarter, and soaring more than 17% in the wake of terrific results as Fool analyst Brian D. Pacampara pointed out. And unsurprisingly, there’s a lot of optimism around the stock.
Why Ciena was never in trouble
As Brian pointed out in his article, there were concerns about Ciena’s business being hit due to tepid demand, and this had kept the stock subdued this year before it busted those myths in its latest report. How could’ve the Street expected Ciena to slowdown this year is a mystery to me, since there have been some concrete indications in the past few months that the stock should have another successful year.
When telco giant AT&T (NYSE: T) sounded out is intention of stepping on the gas to roll out faster networks aggressively, Ciena’s prospects had brightened up since Ma Bell is a 10%-plus customer. AT&T intends to provide LTE coverage to 300 million customers by the end of next year, and the company would be investing $14 billion over three years to upgrade its wireless and wireline networks. Moreover, AT&T expects total capex to be $22 billion a year for the next three years, which is great news for Ciena.
And finally, when optical networker JDS Uniphase (NASDAQ: JDSU) came out with a stunning quarterly report earlier this year, it became clear that networking stocks are in for a good time. Uniphase’s strong execution, product development moves, and an upswing in capital spending by telecom companies led management to forecast a better year. Ciena’s results and outlook further prove that the recovery is not baseless, and this is the reason why optical networking stocks, including Uniphase, should have a good time.
Why Ciena should go higher
An uptick in spending by AT&T is certainly one of the reasons why Ciena should continue getting better as the year progresses. But apart from that, there are a few more reasons which call for attention.
The company is expanding its reach across the globe, driven by its open architecture which has helped it land Tier 1 design wins. Ciena worked its way into the books of Comcast, Tata and Reliance Globalcom in the previous quarter, and this is an evidence of its cutting-edge technology. Ciena has seen a constant improvement in orders over the past few quarter, and the trend continued this time as order inflow in the quarter exceeded revenue of $453 million.
Ciena is witnessing strong customer adoption of its converged architecture, a solution that delivers optical transport, OTN switching, and packet switching. Ciena believes the uniqueness of this solution has helped it land customers in North America, Latin America, and the Asia-Pacific. Ciena’s North American customers are moving from the planning to the deployment phase for this architecture, and this should result in better revenue from the region this year.
The company also cut a deal with Telefónica Vivo, the largest mobile operator in Brazil last month, for providing its 100G solution based on the coherent architecture. Moreover, Ciena said that its European business is showing signs of stability.
Thus, all in all, the future is looking good for Ciena. An uptick in carrier spending, along with global expansion, customer wins, and market share gains should put concerns of weak growth and slow demand to rest.
Harsh Chauhan 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. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!