Insights

Down 36%, This Tech Stock Could Go on a Bull Run

Optical networking equipment provider Ciena (NYSE: CIEN) has been thrashed brutally by the market this year, with its stock losing more than 37% of its value so far, and the company’s fiscal 2022 second-quarter results (for the three months ended April 30, 2022) released on June 2 didn’t help matters.

Share prices of Ciena slipped 3.8% following the release of its quarterly report, as it not only missed expectations but also delivered tepid guidance for the current quarter.

However, a closer look at some of the metrics from Ciena’s latest quarterly report indicates that it may not be long before this networking stock regains its mojo. Let’s see why.

Image source: Getty Images.

Component shortages are hurting Ciena

Ciena’s fiscal Q2 revenue jumped 14% year over year to $949 million, falling slightly short of the consensus estimate of $951 million. Management credited the impressive revenue growth to Ciena’s market share gains in the optical networking space, which have helped it grow at a faster pace than the market it serves.

Gary Smith, Ciena’s president and CEO, said on the second-quarter earnings call that demand for the company’s products “continues to significantly exceed supply, and availability of supply is the most impactful factor in our performance and rate of revenue growth at this time.” The company is benefiting from the growing demand for cloud computing as well as an increase in networking on the edge, with these markets creating the need for faster connectivity and boosting the need for Ciena’s switches, routers, and converged packet optical platforms.

However, supply chain challenges are keeping Ciena from meeting the healthy end-market demand and are also leading to higher costs. Ciena management pointed out on the latest earnings conference call that the company is struggling due to “significantly higher component costs” and an increase in logistics expenses. As a result, its non-GAAP gross margin fell 6.2 percentage points year over year last quarter to 43%.

The company posted an adjusted net income of $0.50 per share last quarter, down from $0.62 per share in the prior-year period and below the Wall Street consensus of $0.54 per share.

There was more bad news in store for Ciena investors, as the guidance fell woefully short of expectations. The company has guided for $900 million in revenue this quarter at the midpoint of its range, while the adjusted gross margin is expected to land in the low 40% range. Analysts were looking for $1.08 billion in revenue from Ciena this quarter. The company also had recorded $988 million in revenue in the year-ago quarter, so its top line is on track to take a big hit.

But Ciena is confident of finishing the year with mid-single-digit revenue growth, though management does point out that component suppliers’ inability to stick to their commitments could hurt this growth. After all, Smith claims that “our revenue is not a function of demand or even production capacity for that matter. It is purely a matter of component, supply, availability.”

With the semiconductor supply chain environment not in good shape, Ciena is facing the music. But then, savvy investors may want to look at the huge order backlog that the company is sitting on, as it is indicative of a terrific growth opportunity.

Why the company could regain its mojo

Ciena management has made it clear that there is no weakness in demand for its products, and the company’s backlog and order book indicate the same. The company had a backlog worth $4 billion at the end of the previous quarter, a big jump compared to $2.2 billion at the end of fiscal 2021 and is higher than the company’s trailing-12-month revenue of $3.82 billion.

Ciena saw strong order inflow in the second quarter of fiscal 2022 following historic inflows in fiscal Q1. The company’s book-to-bill ratio of more than 1.5 last quarter is further indication that it is receiving significantly more orders than it can fulfill.

Not surprisingly, analysts expect Ciena’s growth to accelerate in fiscal 2023, which could happen as it starts fulfilling more of its orders. Its revenue is expected to increase 12% next fiscal year to $4.25 billion, while earnings are expected to jump a whopping 59% to $3.24 per share. More importantly, Ciena is expected to sustain its momentum in fiscal 2024 as well.

CIEN Revenue Estimates for 2 Fiscal Years Ahead data by YCharts

As such, it won’t be surprising to see Ciena stock regain its mojo after a terrible time so far in 2022. That’s why investors looking to buy a potential growth stock on the cheap right now should take a closer look at Ciena, since it is trading at just 18 times trailing earnings, lower than the S&P 500‘s multiple of 21.7.

Harsh Chauhan has no positions in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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