The demand for faster connectivity in data centers has been increasing of late to support artificial intelligence (AI) workloads, and this demand has rubbed off positively on companies such as Ciena (CIEN 0.44%) that are in the business of providing networking components.
Though Ciena may not be a household name in the AI space, shares gained roughly 90% in 2024. What's more, Ciena continues to trade at an attractive valuation, and its latest results indicate that the stock's impressive rally is here to stay.
Let's examine Ciena's catalysts and see why this tech stock has the potential to head higher in 2025, following strong gains in the past year.
Ciena's latest results point toward better times ahead
Ciena released its fiscal 2024 fourth-quarter results on Dec. 12, 2024. The company, which provides optical networking equipment along with switches and routers, delivered $1.12 billion in revenue for the quarter, flat from the year-ago period. However, the company's earnings fell to $0.54 per share from $0.75 in the same quarter last year, as it wrote off older products to focus on the production of AI-focused networking equipment and also increased its outlay on sales and marketing.
Ciena's results were a mixed bag, as Wall Street was expecting the company to deliver $0.65 per share in earnings on revenue of $1.1 billion. Still, the stock jumped significantly following the report, as investors focused on Ciena's sunny prospects. More specifically, the value of new orders that Ciena received last quarter exceeded its revenue, resulting in a book-to-bill ratio of more than 1.
The company was originally anticipating orders to remain below its fiscal Q4 revenue. This was the second quarter in which Ciena's book-to-bill ratio exceeded 1. The book-to-bill ratio is calculated by dividing the value of a company's new orders by the value of orders it fulfilled during the quarter. A reading of more than 1 suggests that the company received more orders than it was able to fulfill, pointing toward strong demand for its offerings.
The strong order inflow explains why Ciena ended the quarter with an order backlog of $2.1 billion. Management also added that it is seeing strong order momentum in the current quarter as well. That explains why Ciena's outlook for fiscal 2025 points toward a nice improvement from its fiscal 2024 performance.
The company is anticipating 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 that the reading is going to be steady from fiscal 2024's 43.6%. That probably explains why analysts are expecting Ciena's earnings to increase by 32% in fiscal 2025 to $2.40 per share, following last year's steep 33% decline.
What's more, analysts are expecting Ciena's bottom-line growth to grow at impressive rates in the next couple of fiscal years as well.
CIEN EPS Estimates for Current Fiscal Year data by YCharts
Why the stock is primed for more upside
Ciena's earnings could hit $4.01 per share in fiscal 2027. Assuming the company manages to hit that mark and trades at 33 times earnings at that time, in line with the tech-laden Nasdaq-100 index's earnings multiple, its stock 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 is going to play a central role in helping Ciena achieve robust levels of earnings growth during this period. That's because the growing proliferation of this technology is going to significantly expand Ciena's addressable market. While the company expects its core market to grow at an annual rate of 2% through 2028 to $14 billion, new growth drivers such as AI could add $12 billion worth of addressable opportunity over the same period at an annual growth rate of 20%.
That won't be surprising, as the growth in network bandwidth and the need for faster transmission speeds in data centers is expected to increase the size of the data center networking market to almost $90 billion in 2030, from just over $38 billion this year. That should pave the way for solid growth at optical equipment providers such as Ciena, which is what analysts are expecting from the company.
What's more, Ciena is now trading at 32 times forward earnings, which is almost in line with the Nasdaq-100 index's earnings multiple. Investors, therefore, are getting a fair deal on this tech stock that's expected to see healthy growth in its earnings over the next three years, and they can consider grabbing this opportunity with both hands based on the potential upside Ciena could deliver.
