It’s been a difficult time for optical providers as lower spending from telecommunications service providers like AT&T (T) and Verizon (VZ) has resulted in weaker demand for Ciena (CIEN) as well as for peers and competitors like Cisco (CSCO). Infinera (INFN) and Juniper (JNPR). That said, Ciena has likely seen the worst of this cyclical slowdown, as book-to-bill levels are back above 1.0 and orders should drive higher sales in the second half of the year. In addition to the short-term recovery, Ciena also offers the opportunity to displace Huawei with European and Asian customers and to gain market share in new metro / edge applications. With that in mind, Ciena should trade closer to $ 62 today and have long-term high single-digit to low double-digit annual returns if the company takes advantage of market expansion opportunities. Better Fiscal First Quarter Results But Not Meaningful As a result, Ciena posted fiscal first quarter results that were above Street’s expectations, but the importance of outperformance is minor. Revenue declined 9% year-over-year and nearly 9% quarter-over-quarter (to $ 757 million), beating expectations by 1%, while gross margin was in line with expectations of 48% (up roughly three basis points per year). over the year). Operating profit increased 2% year over year and the operating margin of 14.6% (plus 150 basis points) was two points better than expected. However, with the company pushing some spending into the second quarter, there won’t be a significant change in outlook. Overall, it was a tough quarter. Like Infinera, Ciena achieved better results in the international segment. However, this was the weakest quarter for North American business since Q1 2019. Service provider revenue declined 15% year-over-year while cable company revenue declined 35% year-over-year, and that’s a tough headwind to overcome. Webscale performance was also poor. Business grew 25% year over year against a weak company but declined 14% quarter over quarter, and management was only expecting mid-single-digit growth for the year. In terms of bright spots, cable providers’ revenue improved more than 12% from the previous quarter. Additionally, the Book-to-Bill has performed well for the first time in a year, and management continues to expect stronger 800G deployments in the second half of the year. The company continues to see strong interest in its WaveLogic 5 Extreme, with initial customer gains double that of the previous WaveLogic Ai. Growth Opportunities Post 2021 One of the most compelling parts of Ciena’s history is the company’s ability to oust Huawei in the service provider market as several countries in Europe and Asia have banned further use of Huawei’s optical devices. Ciena has historically underperformed Europe (10% share versus 30% world share excluding China) and acquiring a significant portion of Huawei’s previous 35% stake in Europe is a key growth opportunity. Nokia (NOK) will fight hard for this business as well, but has had some serious product development and performance issues and has had to compete largely on price – which is increasingly difficult to maintain – for the past few years. Aside from the Huawei opportunity (which also extends to non-European markets such as India), the market for Edge / Metro applications is substantial. It is getting too cumbersome to place routers wherever they are traditionally used, and Ciena has developed solutions that merge optics and IP functionality (along with software automation) to provide an elegant solution to this problem. This could increase the addressable market from around $ 3 billion today to around $ 4.5 billion in 2024. The outlook The outlook from Ciena is threatened several times. Nokia could prove more successful than Ciena in displacing Huawaei and Ciena faces significant competition in the enterprise market from Cisco and Inphi (IPHI). Nonetheless, the WaveLogic 5 Nano with its new ZR product should compensate for part of Inphi’s dynamism. Regarding other risks, service provider spending may recover more slowly, especially after huge industry-wide spending on spectrum, but equipment spending has to come at some point (or spectrum is no good to them). Revenue growth for the full year is likely to be quite modest in FY ’21 at around 1.5% (compared to a forecast of 0% to 3%), but growth is likely to accelerate to over 9% in FY’22 and up to FY ‘ 24 stay above trend. In the long term, sales growth could be around 5%, with the free cash flow margins in the lower to middle teens causing high single-digit annual free cash flow growth in the single-digit range. Analysts Weigh In terms of consensus distribution, there have been 10 purchases and 2 holds assigned over the past three months. So CIEN is a strong buy. At $ 59.17, the analyst average price target implies an upside of 7%. (See Ciena stock analysis on TipRanks) Conclusion Based on a discounted cash flow and margin driven EV / EBITDA valuation approach, Ciena could trade in the low 60s for the short term, with longer term annualized upside potential in the US high single digit to low double digit numbers. Given the imminent recovery in sales and the still underestimated opportunity to gain shares in Europe and expand into new markets, Ciena is now an attractive-priced stock. Disclosure: At the time of publication, Stephen Simpson owned shares in CIEN. Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be construed as an invitation to buy or sell any security.