It's been a difficult week for the performance of shares of optical networking companies as existential artificial-intelligence fears hit the stock market. But then Ciena issued its three-year financial targets, and left Wall Street pleasantly surprised.
Ciena stock rose 8.7% to $370.80 on Thursday and was one of the best-performing components in the S&P 500 for the trading session. Fellow optical networking stocks Corning and Coherent each advanced solidly while Lumentum added 0.2%.
It was quite the turn of fortunes for investors in the sector. The stocks sold off sharply Monday as AI leaders called for a slowdown at the pace the technology has been advancing.
Ciena was at least partially responsible for the stock performances on Thursday as the company's financial guidance pointed to little to no slowdown in AI demand for networking products.
Optical networking companies have become a major part of the AI trade as the data-center buildout has boosted demand for fiber-optic cables that transit data between and beyond data centers.
Ciena held its investor forum Wednesday and outlined three-year financial targets with revenue growing at an annual rate of about 30% with adjusted gross margin increasing annually by 50%. The networking company also forecast adjusted operating margin in the range of 32% to 35% growth through 2029 and free cash flow margins of approximately 20%.
The number that stuck out to Wall Street was the 30% annual revenue growth.
The multi-year financial targets were about 10% ahead of Wall Street's expectations on earnings for 2028, and an unexpected surprise, according to Morgan Stanley analyst Meta Marshall.
Morgan Stanley estimated that based on these financial targets, there is a scenario where Ciena generates earnings of about $20 a share in in 2028 and around $25 a share by fiscal 2029.
Marshall, who raised her price target to $450 from $425 and reiterated an Equal Weight rating on Ciena, noted that this annual earnings growth for the next three years isn't captured in the current valuation of Ciena stock.
The analyst added that Ciena has built a technology lead over the last decade and that the the updated about 30% annual revenue growth through 2029 "point to continued share growth."
"We walked away encouraged about the ability of CIEN to hold or expand share at the bleeding edge," Marshall wrote. "To the extent that hyperscalers are fiber/power constrained, CIEN will have more of an ability to gain share, as technology leadership will be highlighted more."
Morgan Stanley wasn't alone in being both impressed and surprised by Ciena's financial targets.
Rosenblatt analyst Mike Genovese noted that Ciena described itself as supply constrained rather than demand constrained, with about $11 billion in orders in the current fiscal year ending Oct. 31.
The company expects its backlog to end the fiscal year near $10 billion without any expectations of dynamics changing before 2028.
"With promising growth opportunities, we see clear upside in the name with more to come as newer segments are adopted by the market and supply constraints begin to ease in 2028," Genovese wrote.
Rosenblatt has a Buy rating on the shares with a $525 price target.
Optical networking stocks needed some good news and Ciena delivered.
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