CIEN Stock: Ciena Stock Has a Great Case for Bigger Gains

CIEN StockWhy Ciena Could Extend Its Gains

The global networking market is on a massive growth path that is worth tens of billions of dollars, given the superlative demand for faster speeds and bandwidth. The tailwinds will benefit networking technology companies such as Ciena Corporation (NYSE:CIEN), which surged 15% on Thursday to a new 52-week high after posting a bullish backlog.

With a market value of about $3.5 billion, CIEN stock pales in comparison to much larger networking companies like Cisco Systems, Inc. (NASDAQ:CSCO), with a market cap in excess of $150.0 billion, but CIEN stock is growing faster.

Ciena Corporation makes the critical technologies used to drive data through networks. The market segments served include “Wireline,” “Mobile Networks,” “Internet,” “Cable,” “Electric Utilities,” “Media and Entertainment,” “Government,” and “Research.”

Strategic acquisitions have fueled the rise of CIEN stock over the last decade. In 2009, Ciena Corporation acquired the “Metro Ethernet Networks” business of Canada-based Nortel Networks Corporation (OTCMKTS:NRTLQ) which, at one point, was in a neck-and-neck race with Cisco. The most recent purchase was Cyan, which was purchased for $415.0 million in May 2015.

The revenue picture has been stellar for Ciena Corporation, with higher sequential revenues in each year from FY14 to the just-reported FY16, which met the consensus.

The chart shows CIEN stock in a multi-year sideways channel stretching back to 2013. The stock is facing resistance, but a sustained break could see Ciena stock target $30.00.

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Chart courtesy of StockCharts.com

My Bull Case for CIEN Stock

Compared to Cisco, Ciena Corporation has higher growth. While CIEN stock achieved revenue growth of 6.30% in FY16, Cisco is struggling, and is predicted to see its FY17 revenues contract 1.7%. Cisco is expected to rally revenues by a muted 2.4% in FY18, but this is a far cry from the 7.80% growth projected for Ciena Corporation in FY17. (Source: “Ciena Corporation (CIEN),” Yahoo! Finance, last accessed December 8, 2016).

The comparative growth between Ciena Corporation and Cisco favors CIEN stock, due to its much smaller scale of operation, which means it’s easier to attain higher growth rates.

At the end of FY16, CIEN stock had an order $1.15 billion, the highest ever recorded on the books for the company, and close to half of its FY16 revenues.

Of course, the smaller size of Ciena stock also means there is a lot less flexibility, as far as a potential shock to revenues goes. For instance, the loss of Ciena Corporation’s major client would impact revenues much harder.

CIEN stock trades at an attractive 14.4 times its FY18 earnings per share (EPS), which will allow for multiple expansion down the road. For example, even if Ciena stock jumped another 50%, the valuation would still be reasonable. Of course, this is based on conjecture.

The price/earnings to growth (PEG) ratio of 0.88 also supports a higher potential price for CIEN stock. Trading at a discount to its estimated five-year compound annual growth rate (CAGR) for earnings, there is value here.

While there is absolutely no guaranty that Ciena Corporation can deliver on its metrics, the lower multiple and PEG ratio will provide some support.