Description

Ciena Corporation develops and markets communications network platforms, software, and offers professional services. The Company’s broadband access, data and optical networking platforms, software tools, and global network services support worldwide telecom and cable/MSO services providers, and enterprise and government networks.[1]

Investment Rationale

Ciena Corporation (CIEN) sees significant upside with spending from 5G telecom service providers and webscale providers. We think CIEN is trading at an attractive PE multiple given the earnings power from its new products (Wavelogic 5, 800G etc.) and the opportunity to secure huge wins.  

A strong showing from webscale will drive growth. We see strength in webscale* revenue growth despite concerns around cloud capex spending and growth of Acacia’s 600G product. CIEN’s direct webscale segment clocked in US$255mn in 3FQ19, marking an impressive 48% YoY growth. CIEN also mentioned that one of the largest customer being webscale, with three out of top 10 customers being webscale. This signified the increased contribution of webscale to CIEN’s earning profile, with 26.5% of the total revenue derived from webscale. In addition, CIEN’s 800G product will likely be launched later this year, which will consolidate its competitive advantage and accelerate share gains.

Ramp up from networking spending of service providers. CIEN has secured two of the largest service providers in North America as customers – AT&T and Verizon. Telecom revenue has increased by 13% YoY in 3FQ19. The management has expressed confidence in revenue growth with the telecom giants’ continued investment in metro network architecture in FY19 and FY20. Outside of North America, telecom revenue is expected to ramp as well into FY20 for Asia-Pacific (APAC) and Europe, the Middle East and Africa (EMEA). CIEN mentioned that growth will resume in FY20 for APAC including Japan, offset by weakness in India. As for EMEA, there would be further growth as the recent wins for service provider translate into revenue.

RECOMMENDATION

We have a TECHNICAL BUY rating for CIEN. CIEN is currently trading at a P/E ratio of 24.2x. We think the multiple is attractive given the revenue growth opportunity from webscale and service providers. We are also impressed by its ability to continuously secure large market wins. In addition, the higher percentage of software and service contribution to revenue (15.6% for 3FQ19) will mitigate the cyclicality of the sector to changes in capex spending.

[1] Source: Bloomberg

CIEN is expected to rally to new highs as indicated by the technicals below:

• Strong area of demand near the Fibonacci retracement level of 78.6% of 76-46.86.
• The immediate uptrend line is intact.
• The stock has been making a series of higher highs and higher lows
• The demand zone confluence with the lower band of the Bollinger band.
• Stochastic oscillator have a higher chance of crossing at the oversold zone.

CHART LEGENDS

———— Upper Bollinger band

———— Middle Bollinger band

———— Lower Bollinger band