Artificial intelligence (AI) data centers process enormous amounts of data quickly to perform complex calculations, ensuring that AI workloads such as model training and inference run seamlessly.
The rapid movement of data in AI data center clusters has created a massive shortage in the memory market. That’s because memory chips help in feeding huge data sets quickly to AI accelerator chips, which then perform calculations on that data. However, the need to quickly transport large data sets is also creating a shortage in the optical networking market.
Optical networks are known for their higher bandwidth and speed, which is why they are in great demand in AI data centers. Goldman Sachs notes that the optical networking market could be worth a whopping $154 billion in 2028, a significant jump from $15 billion this year. Ciena (CIEN +0.98%) is already benefiting from this market’s phenomenal growth, evidenced by its latest quarterly report.
The good news for investors is that Ciena stock is down almost 50% from the 52-week high it reached just over three months ago. This gives savvy investors a great opportunity to buy a fast-growing company at a relatively attractive valuation. Let’s see why buying this AI stock following its recent slide could be a smart long-term move.
Image source: The Motley Fool.
Ciena is experiencing stunning earnings growth
Ciena released its fiscal 2026 third-quarter results (for the three months ended Aug. 1) on Sept. 3. The company’s revenue jumped 37% year over year to $1.67 billion. What’s more, its operating margin more than doubled year over year to 22.5%, suggesting that it is benefiting from the favorable pricing environment in optical networking.
Today’s Change
(0.98%) $3.15
Current Price
$322.79
Key Data Points
Market Cap
Day’s Range
$320.50 – $327.89
52wk Range
$132.93 – $637.51
Volume
235.5K
Avg Vol
2.5M
Gross Margin
41.61%
As a result, Ciena’s non-GAAP earnings per share more than tripled year over year last quarter to $2.11. However, the stock crashed following its quarterly report. Ciena expects a non-GAAP gross margin of 45% in the current quarter, which would be slightly lower than the 46.4% figure it reported in fiscal Q2. This seems to have spooked investors.
However, there is no reason to panic as Ciena’s margin guidance points toward an improvement over the year-ago period’s reading of 43.4%. Also, management expects a non-GAAP operating margin of 20% in the current quarter, a significant jump from 13.2% in the year-ago period. Given that Ciena forecasts a 30% year-over-year increase in revenue in the current quarter to $1.75 billion, I won’t be surprised to see a sharp spike in the company’s bottom line once again.
More importantly, there is ample evidence suggesting that Ciena’s phenomenal growth will continue. CFO Marc Graff remarked on the latest earnings call:
One month into the quarter, we have booked nearly as much demand as all of Q3 and expect to end the year with more than $10 billion in backlog.
Ciena is on track to end fiscal 2026 with $6.4 billion in revenue. Its sizable backlog and the pace of orders suggest that it can sustain its impressive growth. Additionally, Ciena’s margin should increase in the future thanks to a higher average selling price (ASP). Goldman Sachs notes that the gross margin of optical component suppliers could grow to a range of 48% to 55% due to a favorable product mix.
Even Ciena management believes that the company can “expand gross margins further over the next few years.” So, the outstanding earnings growth the company has been clocking is likely to continue over the long run, setting the stage for this tech stock to regain its mojo and head higher.
The stock could rally once again
Ciena’s earnings are on track to increase by 172% in fiscal 2026 from last year’s level of $2.64 per share. The company is projected to keep growing at a healthy pace over the next couple of years as well.
CIEN EPS Estimates for Current Fiscal Year data by YCharts
However, emerging supply constraints in optical networking, driven by robust demand from AI data centers, could drive a larger jump in Ciena’s earnings. This probably explains why analysts expect its earnings per share (EPS) to grow at a 70% annual rate over the long run.
CIEN EPS LT Growth Estimates data by YCharts
Assuming Ciena’s earnings increase by 70% in fiscal 2029 and 2030 from fiscal 2028’s projected earnings of $16.64 per share, its EPS could hit $48.08 in fiscal 2030 (which will coincide with the majority of calendar 2030). If Ciena trades at even 30 times earnings at that time, a discount to its forward earnings multiple of 40, its stock price will increase to $1,442. That suggests potential upside of 350%, making Ciena an ideal growth stock to buy on the dip as it can skyrocket over the long run.