Ciena Co. Sees Stock Surge After Initial Earnings Drop: What’s Next?
Just as stocks can gap up or down following earnings reports, leading optical networking solutions provider Ciena Co. (NYSE: CIEN) experienced a distinct shift after releasing its fiscal fourth quarter 2024 earnings results. The initial reaction saw the stock drop from $73.21 to $67.01 post-earnings, but it quickly reversed direction, jumping to $82.00 the next morning. This fluctuation surprised investors and caused short sellers to cover their positions as the stock hit a high of $91.82 in subsequent days. Let’s explore the reasons behind this rebound and what it signifies for Ciena’s future.
Fiscal Q4 2024 Report Shows Disappointing Results
The numbers Ciena shared for fiscal Q4 2024 were underwhelming, leading to an initial decline in stock price. The company reported earnings per share (EPS) of 54 cents, falling short of analysts’ estimates by 11 cents. Revenue saw a minor decrease of 0.5% year-over-year (YoY) to $1.12 billion, but just beat expectations of $1.1 billion. The adjusted gross margin also dropped by 210 basis points to 41.6%. Operating expenses climbed to $400.8 million, up from $395 million, giving an operating margin that fell 280 basis points YoY to 5.3%.
This resulted in Ciena making less profit due to fewer sales at a higher cost, justifying the stock’s initial sell-off.
Ciena Adopts a Positive Outlook During Conference Call
Investors often look to the future when companies report earnings. As Ciena shared its results for the past quarter, it also focused on what lies ahead. The company effectively seized the opportunity to spin its performance positively during the conference call.
Ciena’s leadership pointed to the ongoing recovery in cloud computing, the rise of streaming services, and the boom in 5G and artificial intelligence (AI). These trends are expected to drive significant increases in data traffic, positioning Ciena to benefit from higher spending on network systems enhancements. With bandwidth demand growing at 30% YoY for over two decades, the company is confident in its future trajectory.
CEO Gary Smith expressed optimism, stating, “Our Q4 revenue and strong order flow reflect our significant and increasing technology leadership and positive industry dynamics. As Cloud and AI drive bandwidth demand across the network, we are positioned for accelerated revenue growth and market share expansion moving forward.”
Ciena Provides Encouraging Guidance for Upcoming Quarters
The company then announced optimistic guidance for fiscal Q1 2025 and for the full fiscal year 2025. Projected revenue for Q1 is set between $1.01 and $1.09 billion, surpassing the consensus estimate of $1 billion. For the entire fiscal year 2025, Ciena expects revenue to grow by 8% to 11%, totaling between $4.34 billion and $4.46 billion, compared to an estimated $4.31 billion. This represents a significant turnaround from the 0.5% YoY revenue decline reported in Q4 2024, indicating that Ciena views that quarter as a pivotal moment.
Moreover, the company raised its long-term revenue growth forecast for fiscal years 2025 to 2027 from a previous range of 6% to 8% to the new range of 8% to 11%. This confidence is fueled by robust capital expenditure from its cloud-provider clients, who continue to invest in network upgrades to support AI developments.
The Role of AI in Future Network Infrastructure
Ciena anticipates an adjusted operating margin of 15% to 16% by fiscal 2027, emphasizing that AI’s influence is felt beyond just data centers. As traffic moves out from data centers, network upgrades to Ciena’s next-generation systems are essential. Notably, orders from service providers in North America surpassed revenue for the first time in two years during Q4.
Ciena’s clients include major companies such as Microsoft Co. (NASDAQ: MSFT), Amazon.com Inc. (NASDAQ: AMZN), and Alphabet Inc. (NASDAQ: GOOGL), along with media titans like The Walt Disney Co. (NYSE: DIS) and Netflix Inc. (NASDAQ: NFLX), and leading telecommunications firms like AT&T Inc. (NYSE: T) and Verizon Communications Inc. (NYSE: VZ).
CIEN Stock Shows Potential for Further Gains
A bull flag pattern has formed for CIEN stock, which consists of two parts: a steep upward price movement (the flagpole) followed by lower highs and lower lows (the flag). The bullish signal is triggered when the stock surpasses the upper resistance of this descending trendline.
After the FQ4 earnings call, CIEN experienced a surge reaching $82.00, creating potential support levels around $73.87 and $82.00. Over the next two days, the stock climbed higher, peaking at $91.82. The bull flag became noticeable as support levels began to align, indicating a possible breakout if it surpasses $87.60. The daily volume-weighted average price (VWAP) is rising at $80.27, while the daily relative strength index (RSI) is increasing, currently in the 68-band. Important pullback support levels based on Fibonacci are noted at $83.64, $79.49, $76.55, and $73.47.
CIEN’s average consensus price target stands at $92.45, indicating an 11.88% downside, while the highest analyst target is set at $98.00. Currently, the stock holds seven Buy ratings and six Hold ratings, with a 4.41% short interest.
Strategies for Investors: Investors who support CIEN’s potential may consider waiting for a pullback to utilize cash-secured puts at the Fibonacci support levels for a buying opportunity. Should they acquire shares, writing covered calls at upside Fibonacci levels can be an effective way to generate income while also protecting against downside risks through the accrued premiums.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.