Ciena Corp. Recommendation
Buy, Sell or Hold: Ciena Corp. (Nasdaq: CIEN), the Second Company to Profit from the Global
Broadband Arms Race
In last week's Buy, Sell or Hold I recommended Corning Inc. (NYSE:
GLW), based on three factors:
- The coming global "arms race" to get nationwide broadband connectivity. The
arms race recently heated up with the launch of Australia’s $31 billion nationwide broadband plan, which dwarfs
the $7 Billion contemplated in the current U.S. budget.
- China's has accelerated its broadband buildup, which was highlighted by
Corning in its conference call as compensating for a weak U.S. telecom segment. China's broadband buildup is a
component of its $585 billion stimulus package.
- Inventory liquidation appears to be behind us, and carriers, who are facing
double-digit internet traffic growth, cut expenses for equipment to about 2% to 3% of revenue, down from their
traditional level of 15% of revenue. This cannot go on for long.
Well, these same three factors are propelling Ciena Corp. (Nasdaq: CIEN). Corning leads in optical
fiber, but Ciena leads in the supply of sophisticated networking equipment.
Ciena just launched a partnership with NYSE Euronext (NYSE: NYX) on something that is
very near and dear to the hearts of investors: "Speed and ultra-low latency to facilitate unparalleled execution of
equities quotes, trades, options data and other financial transactions in the U.S., Europe and globally." Indeed,
few activities have the sensitivity to speed, volume and reliability of data transmission as stock and options
Ciena's proprietary dense wavelength division multiplexing technology gets up to 100
Gigabytes per second, a first in the world. So, if you want to be fast and have huge data transmission
capabilities, you have to have Ciena's products. But Ciena's competitive advantages do not stop there.
Ciena's products allow carriers to get more capacity from fiber optic networks that
are already deployed. And their intelligent traffic allocation offers superior efficiency, as well. These are
competitive advantages that take time to match.
I absolutely love these technological leaps, which produce margin expansion and sales
pickup at the same time, the surefire recipe for a bigger bottom line. And as I mentioned with regards to Corning,
the United States is lagging behind 14 other Organization for Economic Cooperation and Development (OECD)
countries in broadband access, price and speed. This is a national crisis.
The telecommunications industry will not be able to stay put with the status quo.
There is an explosion of video over the Internet. Not only do we see the phenomenon of YouTube.com, but we now have
many other sources of voracious bandwidth accelerating dramatically.
Mainly, there is a huge pickup in activity in streaming TV series, sports and movies
on sites like Hulu.com, as well as movie
and song downloads. In addition, you have video conference calls including earnings results and video web-events,
such as Money Morning’s own webinars.
Also, there’s the push towards cloud computing, which features all the data and
applications residing and being processed in a remote server, like those of Amazon.com Inc. (Nasdaq: AMZN) ad Yahoo! Inc. (Nasdaq: YHOO).
Last but not least, there’s been a huge surge in online video gaming and you see
product demos and video ads populating many search and web publications. And do not forget "computing everywhere"
with the proliferation of iPhones, RIMM's and other smartphones, as well netbooks, which are constantly connected
to the web with broadband wireless access.
The bottom line is that video traffic and other broadband-chugging applications are
And, while traffic is exploding, the telco carriers in the United States, like most
companies, went into the fetal position and decided to conserve cash. Thus, they kept equipment purchases to the
absolute bare minimum, utilizing whatever inventory they had before reordering.
Thus, it was no surprise that Ciena had a weak first quarter and lowered revenue
guidance for its fiscal fourth quarter to $190 million-$210 million.
But this inconsistency will not last long, as unemployment is stabilizing and the core
of the financial system has become progressively unclogged. The amount of pent-up demand that has built up will
mean an explosive uptick in fourth-quarter sales.
And Ciena, a less diversified and much smaller company than Corning, is bound to see
its stock price appreciate over a long period of time, and by a much higher percentage.
Ciena Corp. stock is still cheap
Ciena is trading at only one times book value. And, despite its negative operating
margins, the company has cut expenses, has a strong cash position of more than $900 million – enough to retire its
entire long term debt and have almost $200 million left – and a much more flexible cost structure than in the
Thus, the huge operating leverage to volume puts this stock in a superb position to
take advantage of the exponential revenue growth that will "surprise" the markets once the telcos start buying
Ciena's products en masse. Wall Street is asleep at the wheel on this one, with many negative views abounding. But
traders have already started covering shorts and some started going long. And in the recent rally, Ciena has led
very nicely, outperforming both the Nasdaq Composite Index and the Standard & Poor’s 500 Index by about 30% since March
The stock has more than doubled since hitting its March low, and it’s still cheap. But
with a rally of this magnitude and the summer doldrums near, where investors take time off and tech equipment sales
are typically are back loaded, it could be imprudent to buy an entire position here.
Recommendation: Buy half a position
of Ciena Corp. (Nasdaq: CIEN) now and wait for a significant
profit-taking correction in order to gradually edge into it (**). With luck, we might be able to buy part of the second tranche between $8 and $9 a share. Go
play some golf this summer and hold for 12 to 18 months.
(**) - Special Note of
Disclosure: Horacio Marquez holds no interest Ciena Corp.