Up 35% in 3 Months, This Tech Stock Could Become the Next Big Artificial Intelligence (AI) Play

Core Viewpoint - Ciena, an optical networking company, has seen a significant stock price increase of 35% over the past three months despite a decline in revenue and earnings in Q3 of fiscal 2024, driven by optimism regarding a rebound in telecommunications spending and the growing adoption of artificial intelligence (AI) [1][2]. Financial Performance - Ciena's revenue in fiscal Q3 fell 12% year-over-year to $942 million, with non-GAAP net income dropping 41% to $0.35 per share [2]. - The company's optical networking revenue decreased by 15%, while routing and switching revenue fell by 27% [2]. - Global telecom spending declined by 17% in the first half of 2024, impacting Ciena's order book and margins [2]. Market Outlook - Dell'Oro estimates a telecom spending decline of 8% to 10% in 2024, but Citigroup anticipates a 3% increase in North American telecommunications spending in 2025 [3]. - Ciena reported a book-to-bill ratio of over 1 in fiscal Q3, indicating strong demand for its offerings [3]. Inventory and Guidance - Ciena's inventory decreased to $937 million from $1.2 billion year-over-year, suggesting improved business conditions [4]. - The company forecasts revenue of $1.1 billion for the current quarter, indicating a flat year-over-year performance, and an adjusted gross margin in the low to mid-40% range [4]. AI Adoption Impact - Analysts from Morgan Stanley and Jefferies have raised their price targets for Ciena, citing the potential impact of AI on its business, with Jefferies increasing its target to $80 [5][6]. - The demand for faster connectivity in AI data centers is expected to create growth opportunities for Ciena, with global data center bandwidth projected to increase more than fourfold from 2023 to 2027 [6][7]. Future Earnings Potential - Ciena's earnings are expected to grow significantly, with projections of $3.39 per share in fiscal 2026, potentially leading to a stock price of $85 if trading at 25 times earnings [8]. - The company is currently trading at 2.5 times sales and 25 times forward earnings, indicating an attractive investment opportunity for those looking to capitalize on AI growth [8].