On Thursday, BofA Securities adjusted its stance on CIENA Corporation (NYSE:CIEN), downgrading the stock from Buy to Neutral while keeping its price target steady at $59.00.
The firm’s decision comes after considering the company’s third-quarter revenues, which, despite beating Street estimates, showed a 12% year-over-year decline. Additionally, CIENA’s fourth-quarter revenue growth guidance of -2.6% fell short of analysts’ expectations of -0.5%.
The revised outlook is based on a 20x calendar year 2025 estimated Price-to-Earnings (P/E) ratio, which aligns with CIENA’s historical range. BofA Securities’ analysis acknowledges the robust management commentary from the last earnings call but points out that the actual financial figures do not match the optimism. The firm also anticipates a weaker gross margin for CIENA, around 43%, compared to the Street’s projection of 44.7%.
The downgrade reflects concerns over potential execution risks next year. While market analysts are forecasting an 8% revenue growth for the fiscal year 2025, BofA Securities projects a more conservative 7% and 6% year-over-year revenue growth for the next two years.
To achieve the optimistic market estimates, orders would need to increase by 13-18%, necessitating a significant uptick in Service Provider spending.
Despite the near-term challenges, BofA Securities still sees CIENA as favorably positioned in the long term to capitalize on its expanded involvement with cloud providers. However, the firm notes that CIENA’s stock has only exceeded the $60 mark once in the past five years.
Given the outlined risks and the limited historical share price growth, BofA Securities believes that the potential for significant upside to CIENA’s current share price is constrained.
In other recent news, CIENA Corporation reported a robust fiscal third-quarter performance, with revenues of $942 million and adjusted earnings per share at $0.35. According to Rosenblatt Securities, CIENA’s orders for the same quarter approached $1 billion, surpassing forecasts.
This development indicates a potential backlog of approximately $2.0 billion by the end of fiscal year 2024, positioning the company for growth in fiscal year 2025.
Stifel reiterated its ‘Buy’ rating on CIENA, highlighting the company’s strong momentum with Communication Service Providers (CSPs) and improving spending dynamics from North American telecommunications service providers. CIENA’s fourth-quarter guidance suggests an anticipated full-year 2024 revenue of around $4 billion, aligning with prior forecasts.
Despite challenges in the routing and switching business, particularly in the international service provider space, CIENA maintains a positive business outlook. This optimism is backed by its high market share in submarine cables, growth in the Blue Planet business line, and the securing of over 65 global broadband customers. Lastly, the company announced the upcoming retirement of CFO Jim Moylan, with a search for his successor currently underway.
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