Telecom equipment company Ciena (CIEN) is gaining momentum in 2015, up nearly 30% after a solid earnings report.
But now that earnings have given CIEN stock a boost, the question becomes whether Ciena can keep charging ahead, or whether the easy money has already been made.
Based on everything we saw in latest Ciena earnings report, though, it looks like the company is positioned nicely for sustainable growth.
In fiscal Q2, revenues increased 11% to $622 million, and adjusted earnings came to 35 cents per share, up from 17 cents per share in the same period a year ago. The Street was looking for revenues of $606.5 million and earnings of 24 cents per share.
The guidance for CIEN stock was also encouraging. For the current quarter, the company expects revenues to range from $610 million to $640 million, in line with analysts’ consensus of $632 million.
What’s Behind the Surge in CIEN Stock
For the most part, CIEN is benefiting from heavy investments — during the past few years — to transform its technology platform. The focus has been primarily on developing systems to handle the complex needs for cloud computing and on-demand networking. This strategy has turned out to be spot-on, as seen with the tremendous growth in the cloud sector from companies like Salesforce (CRM), Amazon (AMZN) and Google (GOOG, GOOGL).
For CIEN, the move to the cloud has also involved diversification of the customer base, such as cable operators and web-scale providers. In other words, the company’s market opportunity is much larger — more than 30% of revenue now comes outside the telecom sector.
To take advantage of the opportunities, CIEN has smartly leveraged partnerships with mega operators like TeliaSonera and Vodafone (VOD). But the one partner that has provided the most momentum is Ericsson (ERIC), which has had lots of success selling CIEN packet-optical solutions.
CIEN has also used acquisitions to beef up its technology. The latest deal came just last month, with the $400 million purchase of Cyan Inc (CYNI). Cyan is a player in the software-defined networking market, which allows customers to customize their solutions. Of course, this is very important when dealing with cloud-based technologies, which involve lots of changes and updates.
Even with the recent spike, CIEN stock, the valuation is still reasonable. The forward price-to-earnings ratio is roughly 16.5, which is roughly in line with other networking operators like Juniper Networks (JNPR).
Then again, CIEN stock could ultimately be buyout bait, especially considering the ongoing consolidation in the sector. The $16.6 billion tie-up between Nokia (NOK) and Alcatel-Lucent (ALU) in particular is a good indication of what kind of future Ciena might have.
In fact, there is already buzz that Ericsson may make a bid for Ciena. Given the strong relationship between the companies already, the scenario seems plausible.
But even if the company doesn’t get snapped up, CIEN stock should continue to benefit from the renewed strength. The company has been disciplined with its cost structure, which has improved margins, and has also made the right bets on the technology side.
More importantly, the megatrend of the cloud shows no signs of slowing, which should mean healthy growth for CIEN stock.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
