2 Stocks Riding the Recovery in Cloud Computing Driven by AI

Key Points

• Ciena provides optical hardware and networking software that enables cloud and service providers to transmit data over long distances with low latency.
• Ciena’s fiscal third quarter book-to-bill ratio rose over one, driven by the cloud providers leading the AI infrastructure buildout trend.
• NetApp posted record GAAP margin and GAAP profits in its fiscal Q1 2025.

The artificial intelligence (AI) boom has been underway throughout 2024 despite many legacy technologies still undergoing normalization after a fantastic post-pandemic reopening surge in 2021. The acceleration of AI deployment is helping to lift legacy technologies like cloud computing, virtualization, networking, and hard disk drives (HDDs) as enterprises work through the inventory glut. Here are two computer and technology sector stocks that are gaining from AI demand and seeing their cloud computing and legacy businesses accelerate again.

Ciena: Cloud Providers Are Leading the AI Infrastructure Buildout  

As a legacy technology company, Ciena Co. NYSE: CIEN is well known for helping build out the internet with its optical fiber and networking solutions. AI requires fast connectivity to transfer oceans of data. Ciena's products are essential for AI deployment, and data centers are a top customer. Ciena's optical transceivers enable data to be transmitted long distances at the speed of light, literally using light signals for low latency. Data center interconnect (DCI) expands beyond just within a data center but enables data to swiftly pass beyond to AI platforms, connecting multiple data centers and cloud providers.

Connecting the Cloud Giants and AI Platforms

Ciena’s customers include some of the largest cloud providers like Alphabet Inc. NASDAQ: GOOGL's Google Cloud as they build out their networks to fortify capacity for the exponential growth of AI data traffic. The growth in cloud computing has enabled cloud providers to generate nearly 30% of Ciena’s total revenues driven by DCI business. Enterprises are not just putting all their eggs into a single basket but instead spreading out their infrastructure to include multiple clouds and cloud providers. Ciena is a major benefactor of this trend.

Networking Platforms Grow as a Percentage of Total Revenue

Ciena impressed investors and analysts alike with its fiscal third quarter 2024 earnings report. Its Networking Platforms segment revenues rose to 74.2% of total revenue at $699.5 million. Its book-to-bill ratio exceeded one, indicating more demand than it can fulfill. Cloud providers largely drove order flow as they led the charge to build out their networks. Cloud provider infrastructure buildout includes undersea cables, long-haul routes, and data center connectivity.

The company expects fiscal fourth-quarter revenue of around $1.06 billion to $1.4 billion, which was in line with consensus estimates. The long-term compound annual growth rate (CAGR) is in the 6% to 8% range, with fiscal 2024 revenues expected to be around $4 billion.

NetApp: Riding the Hybrid Multicloud Tailwind

NetApp Inc. NASDAQ: NTAP provides hybrid cloud and data infrastructure software and hardware solutions. These enable companies to access and manage their data securely across all environments, such as viewing through a single pane of glass. NetApp is native to all the major cloud providers. It lets companies set up on-premise and private clouds for sensitive data and mission-critical applications and in public clouds for routine data and application management. From servers to all-flash data storage arrays, NetApp is a one-stop shop for digital transformation and cloud migration.

AI Deployment Is Revitalizing Cloud Growth

In its fiscal first quarter of 2025, NetApp reported a record non-GAAP operating margin of 26% and a record first-quarter net income of $1.56. Its first-party and marketplace cloud storage services revenues rose 40% year over year. Its Hybrid Cloud division generated $1.38 billion in revenue, up from $1.28 billion in the year-ago period. Its Public Cloud division generated $159 million in revenue, up from $154 million last year. NetApp has $3.02 billion in cash and cash equivalents.

NetApp Is Winning More Contracts and Logos 

NetApp has won more than 50 AI and data lake modernization wins, including one of the world's largest oil and gas companies, for its AI and high-performance computing (HPC) workloads. Its all-flash storage was selected to handle its 40,000 GPUs and CPU cores, which run 3D virtualization workloads and simulations.

Another leading financial services institution selected NetApp to consolidate petabytes of data into a single data lake for AI and analytics. These workloads range from fraud detection and portfolio management to credit scoring.

More Upside to Come as NetApp Issues Upside Guidance

NetApp provided upside guidance for its fiscal second quarter of 2025, with EPS of $1.73 to $1.83 versus $1.71 consensus estimates.

Revenues are expected between $1.565 and $1.715 billion versus $1.63 billion consensus estimates.

Its fiscal full-year 2025 EPS was guided to $7.00 to $7.20 versus $6.89 consensus estimates.

Full-year revenue is expected between $6.48 billion and $6.68 billion versus $6.55 billion estimates.