Ciena (NYSE:CIEN) is not a household name in the technology space, but that hasn’t prevented the stock from outperforming the broader sector in 2020 thanks to the business it is in.
While COVID-19 has put the brakes on many businesses, Ciena has been sailing through nicely as it deals in networking hardware, software, and services. Demand for the company’s products and services has remained resilient in these difficult times as telecommuting, online education, and a surge in video gaming have emphasized the necessity of bandwidth amid the novel coronavirus pandemic.
Let’s take a closer look at Ciena’s business and find out why it could remain a top growth stock amid the uncertainty.
COVID-19 hasn’t hampered Ciena’s growth
Ciena reported its fiscal second-quarter results last month. The company’s revenue for the three months ending May 2 increased 3.4% annually to $894.1 million, easily beating analysts’ concensus estimate of $880.4 million. Adjusted earnings shot up from $0.48 per share in the year-ago period to $0.76 per share in the previous quarter, crushing analysts’ expectations of $0.49 per share by a huge margin.
Ciena’s impressive growth is not surprising as the company supplies hardware and software to enable optical transport networks that are critical for fast internet connectivity. According to Evercore ISI analyst Amit Daryanani, Ciena witnessed a 30% jump in demand from large cloud service providers last quarter.
Information technology (IT) management software provider Flexera’s 2020 State of the Cloud report reveals that 59% of the cloud-related enterprise executives surveyed expect to exceed their planned cloud usage this year. As a result, organizations are either looking to either increase their existing capacity to run cloud-based applications or are looking to move more services to the cloud in a bid to maintain business continuity.
Ciena management also said something similar over the latest earnings conference call. CEO Gary Smith pointed out that “over the medium to longer term, the rise of remote everything will accelerate the drive toward cloud-based models and virtualization.”
The good news for Ciena is that the demand for optical components in the cloud was already growing at a fast clip before the pandemic struck. A third-party report estimates that the cloud optics market could nearly triple from $2.3 billion in revenue last year to $6.8 billion in 2023. The novel coronavirus impact could accelerate sales growth as cloud service providers ramp up the deployment of faster components.
On the other hand, the rollout of 5G networks is opening new avenues for Ciena. The company won contracts from two major Indian telecom carriers, Reliance Jio and Bharti Airtel, to deploy optical networking infrastructure last year, and it expects the momentum to continue in the future. The likes of Verizon, Comcast, and others are also upgrading their networks with the help of Ciena to deliver fast internet speeds.
Not surprisingly, Ciena’s guidance for the current quarter is still a decent one even though the company says that it may witness “slower business velocity” because of COVID-19-related restrictions. Ciena estimates fiscal third-quarter revenue of $970 million at the midpoint of its guidance range, a slight increase over the prior-year period’s revenue of $960 million.
However, any near-term slowdown in Ciena’s business shouldn’t be a major cause for concern, as the company indicates revenue will only be delayed.
“It is simply taking longer than normal to execute with certain customers, but we anticipate that it will shorten over time as conditions continue to improve,” Smith said.
More reasons to go long
Ciena’s resilient performance is not the only reason to like the stock. The company controlled 24% of the global optical network hardware market (excluding China) at the end of 2019. What’s more, its market share in this space has grown consistently over the years.
TechNavio estimates that the optical networking hardware market could add nearly $7 billion in revenue through 2024, with the overall market growing at an annual rate of 6% over the 2019-2024 forecast period. Ciena could corner a nice share of that growth thanks to its leading position in optical networking hardware.
And finally, Ciena stock is cheap right now. It trades at a trailing price-to-earnings (P/E) ratio of 26 as compared to the five-year average multiple of over 56 times. A forward earnings multiple of 17 points toward bottom-line growth, which gives investors yet another reason to go long this networking play.