On Thursday, JPMorgan (NYSE:JPM) revised its price target for CIENA Corp (NYSE: CIEN) shares to $60 from the previous $67, while maintaining an Overweight rating on the stock. The firm's analyst cited a slower-than-expected recovery in telecom service provider orders and demand as the primary reason for the adjustment.
According to the analyst, discussions at the 52nd Annual TMC Conference with optical equipment vendors revealed that the anticipated rebound in the telecom sector is now projected to extend into late 2024 or early 2025.
CIENA, which had already tempered its revenue expectations for the year, is faced with the challenge of achieving its full-year guidance of a -5% revenue decline at the midpoint. The analyst expressed skepticism about the company's ability to achieve a significant sequential revenue increase from the second fiscal quarter's trough levels, aligning with industry consensus of a prolonged recovery in the telecom vertical.
Consequently, JPMorgan now forecasts an 8% year-over-year revenue decline for CIENA, with full-year revenue likely to hit the lower end of the $4.0 to $4.3 billion guidance range.
Despite the reduced revenue expectations, the analyst anticipates that the second fiscal quarter will represent the lowest point for CIENA's revenue, with subsequent improvement driven by stronger cloud orders. This outlook is supported by better cloud order performance reported by competitors Juniper and Infinera (NASDAQ:INFN).
JPMorgan anticipates a return to long-term revenue growth for CIENA in fiscal year 2025, underpinned by the company's exposure to the switching and routing and network access segments, as well as the incremental total addressable market (TAM) in these areas.
The firm also forecasts that CIENA will exit fiscal year 2024 on a high earnings run-rate, setting the stage for earnings growth exceeding 20% in both fiscal years 2025 and 2026. This earnings leverage is expected to become more significant as the company moves past the revenue trough of the second fiscal quarter.
In conclusion, JPMorgan reaffirmed its Overweight rating on CIENA, emphasizing the stock's value at 16 times its normalized earnings power. The analyst highlighted the company's potential for a re-rating due to growth tailwinds from its involvement in cloud infrastructure build-out, particularly through its datacenter interconnects.
Despite the lowered stock price target, the firm remains optimistic about CIENA's long-term prospects, albeit acknowledging that the increase in momentum may be less pronounced compared to suppliers focused on intra-datacenter equipment.
InvestingPro Insights
As CIENA Corp (NYSE: CIEN) navigates a challenging telecom environment, recent data from InvestingPro offers insights into the company's financial health and market position.
With a market capitalization of $7.13 billion and a P/E ratio of 27.96 for the last twelve months as of Q1 2024, CIENA appears to have a solid standing. The company's revenue growth of 13.6% over the last twelve months indicates resilience despite sector headwinds, and a strong gross profit margin of 43.27% suggests effective cost management.
An InvestingPro Tip highlights that CIENA's management has been actively buying back shares, signaling confidence in the company's value. Furthermore, the valuation implies a strong free cash flow yield, which could be attractive to investors seeking companies with potential for cash generation.
For those interested in deeper analysis, InvestingPro provides additional tips, including perspectives on CIENA's P/E ratio relative to near-term earnings growth and its liquidity position. Readers can find a total of 8 additional InvestingPro Tips by visiting the dedicated page for CIENA at https://www.investing.com/pro/CIEN. Remember to use coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription.
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