The demand for faster connectivity in data centers has been growing recently to support artificial intelligence (AI) workloads, and this demand has had a positive impact on companies such as The price (NYSE: CIEN) which deal with the provision of network components.
While Ciena may not be a household name in AI, the stock is up roughly 90% in 2024. What’s more, Ciena continues to trade at an attractive price valueand its latest results show that the stock’s impressive rise will remain.
Let’s examine Ciena’s catalysts and see why this tech stock has the potential to rise in 2025, after strong growth in the past year.
On December 12, 2024, Ciena announced its results for the fourth quarter of fiscal year 2024. The company, which supplies fiber-optic networking equipment along with switches and routers, had revenue of $1.12 billion for the quarter, which was the same as a year earlier. However, the company’s earnings per share fell to $0.54 from $0.75 in the same quarter last year, as wrote off older products to focus on manufacturing AI-focused networking equipment and also increased sales and marketing expenditures.
Ciena’s results were mixed, as Wall Street expected the company to post earnings of $0.65 per share on revenue of $1.1 billion. Still, the stock jumped significantly after the report, as investors focused on Ciena’s sunny outlook. Specifically, the value of new orders Ciena received last quarter exceeded its revenue, resulting in a book-to-bill ratio of more than 1.
The company initially expected orders to remain below its fiscal fourth quarter revenue. This was the second quarter in which Ciena’s price-to-book ratio exceeded 1. The price-to-book ratio is calculated by dividing the value of the company’s new orders by the value of the orders it filled during the quarter. A reading greater than 1 suggests that the company received more orders than it could fill, indicating high demand for its offering.
The strong order flow explains why Ciena ended the quarter with a $2.1 billion backlog. The management also added that it records a strong momentum of orders in the current quarter as well. This explains why Ciena’s outlook for fiscal 2025 points to a good improvement over fiscal 2024 results.
The company anticipates revenue growth of 8% to 11% in the current fiscal year. That would be a nice improvement over the previous fiscal year’s revenue decline of 8.5% to $4 billion. Moreover, Ciena’s adjusted gross margin guidance of 42% to 44% for fiscal 2025 suggests the reading will be flat from 43.6% in fiscal 2024. That probably explains why analysts expect Ciena’s earnings to rise 32% in fiscal 2025 to $2.40 a share, after last year’s sharp 33% decline.
Moreover, analysts expect Ciena’s bottom line to grow at impressive rates over the next few fiscal years as well.
Ciena’s earnings could reach $4.01 per share in fiscal 2027. Assuming the company can hit that mark, it trades at 33 times earnings at that time, according to tech-heavy Nasdaq-100 multiple of the index’s earnings, its share price could jump to $132. That would be a 53% increase from current levels, indicating that Ciena stock could deliver healthy gains over the next three years.
AI will play a central role in helping Ciena achieve strong levels of earnings growth during this period. This is because the growing spread of this technology will significantly expand Ciena’s addressable market. While the company expects its core market to grow at an annual rate of 2% to $14 billion by 2028, new growth drivers like artificial intelligence could add an addressable opportunity worth $12 billion over the same period at an annual growth rate of 20%.
This will come as no surprise, as growth in network bandwidth and the need for higher transmission speeds in data centers is expected to increase the size of the data center networking market to nearly $90 billion in 2030, up from just over $38 billion this year. That should pave the way for solid growth for optical equipment suppliers like Ciena, which analysts expect from the company.
What’s more, Ciena now trades at 32 times earnings, nearly in line with the Nasdaq-100’s multiple. Investors, therefore, are getting a fair deal for this tech stock, which is expected to post healthy earnings growth over the next three years, and may consider grabbing this opportunity with both hands based on the potential upside that Ciena could provide.
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Sharp Chauhan has no position in any of the listed stocks. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
