Ciena Stock Powers the AI Cloud Boom—Don’t Miss Out

Key Points

• Ciena reported a weak Q3 2024, but underlying signs of a recovery were clear by the book to bill ratio rising above 1.
• Cloud providers are leading the recovery from inventory glut as they upgrade their networks to handle AI deployment.
• Ciena announced a $1 billion stock buyback starting in fiscal 2025 through to the end of fiscal 2027.

Ciena Co. NYSE: CIEN can be considered a legacy company in the computer and technology sector when it comes to the Internet. It was one of the original manufacturers of optical fiber, which provided networking switches and connectivity solutions since 1992. The company has managed to stay relevant, unlike so many internet boom companies, and remains on the cutting edge of the artificial intelligence (AI) revolution. Ciena is essential to the AI boom as it provides one of the crucial elements required for AI deployment: high bandwidth and low latency connectivity.

Ciena operates in the computer and technology sector, competing with networking companies like Cisco Systems Inc. NASDAQ: CSCO, Juniper Networks Inc. NYSE: JNPR, which was acquired by Hewlett Packard Enterprises Inc. NYSE: HPE, and Infinera Co. NASDAQ: INFN which is being acquired by Nokia Oyj NYSE: NOK.

How Ciena Is Essential to the AI Revolution

Ciena is a leader in the optical networking segment, as its products enable long-distance, high-capacity data transmission solutions for the backbones of numerous networks. Data transmission volumes will only grow, driven by AI deployment and cloud computing. Its optical transceivers enable low-latency transmission, which is essential for AI applications to relay responsiveness and fast performance. Its Blue Planet AI-powered software-defined network (SDN) enables network operators to program, automate, and manage networks, orchestrate end-to-end services, and scale bandwidth on demand as needed.

Cloud Providers Lead the Recovery  

Ciena is approaching positive normalization after many volatile years driven by the pandemic shortage and post-pandemic inventory glut. Cloud providers are leading the recovery, building out networks to support cloud and growing AI traffic. Data centers are a big chunk of Ciena’s cloud provider clients. Three of the four major cloud providers are driving demand for Ciena’s 400 ZR, a high-capacity datacenter interconnect (DCI) capable of transmitting 400 GB ethernet over DCI links, targeting a minimum of 80 kilometers.

Ciena's other client group, service providers, is experiencing a gradual recovery as the inventory glut is digested. Ciena still expects the U.S. to recover fully in a few quarters, while Europe continues to lag due to geopolitical and macroeconomic headwinds.

Gloomy Headline Numbers Underscore Improving Metrics

Ciena's third-quarter of 2024 earnings report was a sign of relief as results underscore the recovery occurring, enabling a turnaround after many negative quarters. The company reported EPS of 35 cents, beating analyst expectations by 6 cents. GAAP net income was $14.2 million, down from $29.7 million last year. Adjusted net income was $50.8 million, which was also lower than the $89.1 million non-GAAP income in the year-ago period. Revenue fell 11.8% YoY to $942.3 million, which was better than expected compared to the consensus estimates of $928.31 million. Ciena reported a strong book-to-bill ratio above 1, indicating stronger demand that it can fulfill.

Ciena Issues Flat Guidance

Ciena expects revenues of $1.06 billion to $1.14 billion in the fourth quarter of 2024 versus $1.12 billion in consensus estimates. Adjusted gross margin is expected to be in the low 40% range, and adjusted operating expenses are expected to be around $350 million. Full-year 2024 revenues are estimated at around $4 billion, with a 4% to 8% CAGR long-term. CIEN stock tumbled 7% the following days.

Ciena CEO Gary Smith commented, "We delivered strong results for the fiscal third quarter that reflect growing momentum with cloud providers and continued gradual recovery with service providers. With leading innovation that is well-aligned with our customers' focus on building cloud and AI-capable infrastructures, we are well-positioned to continue to gain share and deliver profitable growth.”

On Oct. 2, 2024, Ciena announced a $1 billion stock buyback program commencing in fiscal 2025 and ending in fiscal 2027. CIEN stock surged 7% on the announcement.

CIEN Is Forming a Potential ABCD Reversal Pattern

An ABCD pattern is a harmonic reversal pattern comprised of two higher peaks and one higher low. The pattern resembles a rising lightning bolt. A market structure high (MSL) sell trigger often triggers the reversal.

CIEN stock initially sold off on its earnings report and guidance to a swing low of $50.83, forming the C-point. Shares rallied higher through the B-point pre-earnings peak at $59.42 to continue higher toward an imminent D-point, which could trigger a reversal. The daily anchored VWAP support is rising at $56.78. The daily relative strength index (RSI) is rising to the 75-band. Fibonacci (Fib) pullback support levels are at $62.91, $57.69, $53.76, and $50.83.

Ciena’s average consensus price target is $61.00, and its highest analyst price target is $68.00. Analysts have given it 10 Buy ratings and three Hold ratings.