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Ciena: It Will Take Time for Sentiment to Change but Valuation Is Compelling, Says Top Analyst
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Ciena: It Will Take Time for Sentiment to Change but Valuation Is Compelling, Says Top Analyst

For those who have already forgotten, the past 3 trading sessions were a painful reminder that, yes, stocks also go down. It was even more painful for investors of networking player Ciena (CIEN), as shares cratered by 30%.

The sharp drop came after the release of Ciena’s fiscal Q3 2020 financial results.

In the quarter, the optical networking equipment company reported revenue of $976.7 million, reflecting a year-over-year increase of 1.7% and exceeding the consensus estimate by $2.21 million. The Street’s forecast for the bottom-line was also beaten, as non-GAAP EPS came in at $1.06, $0.24 ahead of the consensus estimate. Add into the mix non-GAAP gross margin of 48.2%, compared to the 45% forecast, and naturally, the first reaction is to applaud a strong quarter despite difficult conditions.

But as the saying goes, past performance is no guarantee of future results, and to put it bluntly, Ciena expects the near-term future to bear no resemblance to the recent past. Basically, investors sent shares tumbling after being confronted with Ciena’s forward guidance.

Ciena slashed its outlook by calling for fiscal Q4 2020 revenue of between $800 and $840 million, well below the Street’s $997 million forecast. At the mid-point, this suggests a 17%-18% drop in product sales year-over-year, compared to Wall Street’s call for a 2% uptick.

Not mincing his words, Needham analyst Alex Henderson argues the disappointing guidance is akin to Ciena throwing a “bomb into service provider tent.” However, Henderson also highlights the silver lining that comes as a result of the vicious sell-off. 

The 5-star analyst said, “Ciena sees the weakness as a reflection of macro distress resulting in Service Providers running their networks hotter… We think uncertainty will keep CIEN in a trading range over the next six months. As we get clarity on the outlook into CY21, we think CIEN is substantially over-sold and attractively priced. Looking out to CY22, CIEN is trading at only 12.3x EV/E. We think it is worth at least 16x-18x.”

Although he is optimistic about the long-term prospects, Henderson expects “it will take three to six months to work through to better visibility to get CIEN moving again.”

As a result, Henderson slashed his price target from $65 to $58. Nevertheless, following the share price decline, the upside potential from current levels is a strong 35%. The analyst’s Buy rating stays as is. (To watch Henderson’s track record, click here)

Ciena still has a strong backing on Wall Street. Based on 10 Buys and 3 Holds, the stock has a Strong Buy consensus rating. With an average price target of $53.77, the 12-month upside potential comes in at ~28%. (See Ciena stock analysis on TipRanks)

To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.

Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.

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