Ciena Corporation: Why This 5G Stock Could Deliver Big Returns

A 5G Stock for Risk-Averse Investors?

In today’s red-hot tech sector, there is no shortage of companies trying to capitalize on the booming 5G industry. And, as you’d expect, in their search for growth, investors have already bid up the share prices of many 5G stocks.

In other words, if you want to get into the hottest 5G companies right now, prepare to pay a pretty penny for them.

Of course, the upward momentum could be strong. But as a risk-averse investor, I’m not exactly a fan of buying stocks after they’ve already shot through the roof, especially considering the uncertainties we are still facing at the moment. With the COVID-19 pandemic yet to end, the deployment of 5G networks has been delayed in many regions.

The stock market does not like uncertainty. Plus, whenever there is a sell-off, market participants have a tendency to first unload the stocks that went up the most before.

And that, my dear reader, is why Ciena Corporation (NYSE:CIEN) could be an opportunity right now.

Ciena Corporation: A Wild Ride in 2020

Ciena Corporation is a telecommunications networking equipment and software supplier. Headquartered in Hanover, Maryland, the company has been around since 1992 and now serves more than 1,500 customers in over 80 countries around the world. (Source: “Ciena Corporation Fall 2020,” Ciena Corporation, last accessed October 15, 2020.)

Ciena shares had a quite a ride this year. CIEN stock went on an impressive rally from April to August, but fell sharply after the company’s latest earnings report last month. Right now, the company is trading at about the same level as it was  at the beginning of this year.

While Ciena stock is not exactly a market favorite at the moment, it deserves investor attention for a very simple reason: because the company’s networking equipment and services help telecom operators deploy 5G networks, it is well positioned to benefit from the 5G era.

Now, as I mentioned earlier, the COVID-19 pandemic has impacted the pace of the 5G rollout. However, because Ciena Corporation already has a leading market position in its existing operations, it does not need to rely on 5G to generate growth.

Just take a look at the chart below. From Ciena’s fiscal year 2016 to fiscal year 2019, its adjusted earnings per share increased from $0.93 to $2.11, translating to a compound annual growth rate (CAGR) of 31.4%.

Source: Ibid.

And even though the COVID-19 pandemic has impacted Ciena’s business this year, its latest financial results still showed a lot of resilience.

Ciena last reported earnings on September 3, 2020. In the third quarter of the company’s fiscal year 2020, which ended August 1, it generated $976.7 million in revenue, representing a 1.7% increase year-over-year. (Source: “Ciena Reports Fiscal Third Quarter 2020 Financial Results,” Ciena Corporation, September 3, 2020.)

Considering that the pandemic resulted in a major slowdown across industries, Ciena’s top-line growth is quite commendable.

What’s more impressive, though, is that the business also became more profitable.

In the third fiscal 2020 quarter, Ciena Corporation achieved an adjusted gross margin of 48.2% and an adjusted operating margin of 22.4%. To put that in perspective, the adjusted gross margin and adjusted operating margin in the year-ago period were 44.7% and 16.2%, respectively.

In a time where sales growth might be limited due to pandemic-induced slowing orders, substantial margin expansion is definitely good news.

At the bottom line, Ciena generated adjusted earnings of $1.06 per share in the reporting quarter, marking a whopping 49.3% increase from the $0.71 per share earned in the year-ago period.

However you look at it, this 5G company had a solid quarter. What market participants did not like as much was the guidance.

In the earnings conference call, Ciena’s chief financial officer, Jim Moylan, said, “the length and breadth of the COVID-19 pandemic and its effect on the global economy remains uncertain, and it is leading to more cautious customer spending behaviors and ongoing difficulties with operationalizing projects. This resulted in Q3 orders coming in significantly below revenue, something we have not seen for some time and a softening of our near-term outlook.” (Source: “Ciena Corporation (CIEN) CEO Gary Smith on Q3 2020 Results – Earnings Call Transcript,” Seeking Alpha, September 3, 2020.)

For the fourth quarter of Ciena’s fiscal year 2020, management is projecting $800.0 million to $840.0 million in revenue and adjusted gross margin between 46% and 48%.

Analyst Take

At the end of the day, keep in mind that with the recent pullback in CIEN stock, value has started to appear. Trading around $42.00 at the time of this writing, Ciena Corporation has a price-to-earnings (P/E) ratio of 17.3 times. This is substantially lower than S&P 500 companies’ average P/E ratio of 35.0 times. (Source: “S&P 500 PE Ratio,” multpl.com, last accessed October 15, 2020.)

The company’s business is solid as it stands. Once the pandemic is over and 5G infrastructure investments pick up, I wouldn’t be surprised to see Ciena stock getting renewed investor attention.