Street Pushes Ciena, but Spending Pullback Quiets Even a Bull
Ciena (CIEN) is emerging as networking's wonder child. But as a spending slowdown continues to punish telecom outfits big and small, even a Ciena booster is sounding cautious.
The Chaff
Assuming that it's possible to pick the wheat of the networking field from the chaff, is it now time to buy Ciena? Not just yet, says one New York buy-side analyst whose firm holds a position in Ciena. "Picking the best company in an ailing sector is not a wise move," says the analyst. This cautious refrain runs counter to a growing chorus of bullish sentiment growing around Ciena. Morgan Stanley Dean Witter issued a note to clients Friday morning touting Ciena as the heir-apparent in optical switching, as Cisco earlier this week pulled the plug on its Monterey mega-router and Sycamore admitted Thursday to stumbles with its competing switch. Morgan Stanley was an underwriter of public stock offerings for Ciena and Sycamore. Eleven telcos and ISPs have purchased Ciena's CoreDirector and about half of them are running live traffic through the switch. Though the switch accounts for just 10% of Ciena's total revenue, it has proven to be a strong seller as the market for transport equipment has gotten weak with oversupply, pushing down prices. Optical switches have demonstrated an ability to manage network traffic routes and, if you believe the developers, effectively cut network operating costs by as much as 90%. The cost savings presumably come from the elimination of numerous electronic boxes and attendant devices. These smarter, deeper boxes can speed up a service provider's response time, allowing it to sell capacity in lucrative short-term blocks as opposed to the traditional long lead times and long bandwidth contracts. In short, these switches can help network operators generate more sales from existing capacity.Doubt at 10
But the bull story aside, nearly every company that relies on capital spending from the telcos finds itself in the path of a business-choking slowdown. Ciena, as many observers point out, cannot expect to avoid the undertow entirely. "The bulls argue that we've seen the preannouncements and that all the bad news is now behind us," says the analyst. "But I'd argue the earnings reports coming up will be worse because you'll see more bad news in the balance sheets." Indeed, Sycamore Thursday set a steep charge to cover a writedown of unsold inventory. Even if Ciena executes as expected, it still could be tarnished by negative industry outlooks from Nortel, Cisco and the others. This would spell more downside for the stock. And with so many telcos still suspending orders and cutting budgets, the outlook is far from rosy. "Right now," says the analyst, "I wouldn't give anyone the benefit of the doubt in this market.">To order reprints of this article, click here: ReprintsTheStreet Premium Services For Personal Service: 877-471-2967
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