Here's Why Ciena Corporation Stock Fell 16.1% in August

9/11/17

By Anders Bylund, Motley Fool

What happened

Shares of fiber-optic communications-equipment builder Ciena (NYSE:CIEN) fell 16.1% in August 2017, according to data from S&P Global Market Intelligence. Already fighting a 7% headwind based on general weakness in the fiber-optic networking industry, Ciena knocked out a strong earnings report at the very end of August. But thanks to timid next-quarter guidance, share prices took an immediate 9% dive the next day anyhow.

So what

Ciena's third-quarter sales rose 8.7% year over year, landing at $729 million. Adjusted earnings increased from $0.42 to $0.51 per diluted share. Both figures came in slightly above Wall Street's projections, which only called for earnings of $0.49 per share on sales near $727 million.

Looking ahead, Ciena's management set up fourth-quarter revenue guidance at approximately $735 million, far short of analysts' $770 million average projections at the time. The company also expects operating costs to rise, yielding adjusted earnings of approximately $0.42 per share in the fourth quarter. Analysts had been looking for something closer to $0.50 per share.

Several Ethernet and fiber optic networking cables, plugged into a large-scale networking switch.

IMAGE SOURCE: GETTY IMAGES.

Now what

Management noted that service providers have been tightening their optical equipment purse strings in recent quarters but that this trend should be short-lived. Multiple drivers for strong long-term growth exist, ranging from 5G wireless network upgrades to the Internet of Things. These unstoppable macro trends require lots and lots of reliable bandwidth on the back end, and fiber-optic solutions like Ciena's high-speed routers and switches can provide it.

In a recent Barron's interview, Ciena CEO Gary Smith said that his company's shares are "considerably undervalued" compared to the massive growth drivers that lie ahead. Wider use of digital tools on a global scale amounts to another industrial revolution, driven by huge data collections and the number crunching that these treasure troves inspire.

"It's an industrial revolution we are going through whose scale is massive, and whose velocity is like nothing we've ever seen before," Smith said. "We live in a world that's globally connected. Ciena provides the circulatory system for that."

But many investors don't see this connection yet, which is bad news for Ciena's share prices. The stock has traded largely sideways over the last 52 weeks and can now be bought for less than 11 times forward earnings. Opportunistic investors may want to take a closer look at Ciena as long as the discount lasts.

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