Why Ciena Is No Longer Worth the Risk

NEW YORK ( TheStreet) -- The world of investing can be a funny place sometimes, in that, every now and then you come to realize that you are beating up on a company that you once spent so much time defending.

Telecommunications equipment maker Ciena ( CIEN) serves as the perfect example. It's a company that I've always liked for its technology.

But on the heels of its recent earnings announcement, wanting to give it the benefit of the doubt has become tough. Though a painful death is far from imminent, I just don't think the stock is worth the risk.

The Quarter That Was

In its fiscal third quarter, Ciena reported an operating loss of $4.1 million or 4 cents per share on revenue of $474.1 million. Although revenue arrived in-line with its own forecasts while also showing an annual growth of 9%, it was below analysts' 2 cents per share loss estimate as gross operating margin fell 440 basis points to 39.5%.

What's more, its loss of more than $4 million was glaring when compared to a profit of $8.3 million or 8 cents per share in the same period of a year ago. CEO, Gary Smith attributed the disappointing results to "ongoing macroeconomic challenges and slower than expected roll-outs of new design wins."

The company's outlook was not much better. Ciena expects fourth quarter revenue of $455 to $489 million -- below analysts' estimates of $499.5 million.

Its projections seems to be consistent with the cautious numbers offered by rivals such as Cisco ( CSCO) and Juniper ( JNPR).

But unlike Ciena, they are bigger, profitable and yet seem more agile. Also different is that they have shown an ability to maneuver and adjust more easily. This is despite intense competition and weaker demand which has hurt their performance.

Moving Forward

With these concerns in mind, Ciena's investment worthiness at this point is just not there. This is even though it's valued at $1.3 billion and trading at less than annual revenue suggesting that the stock might be cheap by many standards.

The potential return doesn't justify the risk. If Ciena can demonstrate significantly improved operating margins while growing market share with carriers such as AT&T ( T) and Verizon ( VZ) then I might change my mind.

On that note, if there is one for Ciena to be optimistic about, it is that carrier spending will soon return. The group, which includes (among others) Comcast ( CMCSA) and the aforementioned AT&T and Verizon, have not opened their wallets to spend as expected. At least not according to their long term needs. One has to wonder that at some point they will and Ciena stands to see a significant portion of that revenue.

That said, investors have to wonder what Ciena intends to do about its massive pile of $1.4 billion in convertible debt -- one that has the potential to translate into 55 million additional shares.

Also, I wonder if management will be able to overcome the product roll-out challenges it faced in the recent quarter. If and when Ciena's customers are able to spend, will it have sufficient supply to fill demand or will rivals such as Alcatel-Lucent ( ALU) or even a more prominent name such as Cisco step in and deliver where Ciena can't.

Bottom Line

A lot has to happen for Ciena to be considered a true turnaround candidate. It needs to show that it can innovate and leverage its existing technological advantage to fight off competition and added pricing pressure. What's more, with so much R&D spending of late, the company needs to show investors the fruits of their support. But until then, I don't see how this stock makes sense right here.

At the time of publication, the author held no position in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
Richard Saintvilus is a private investor with an information technology and engineering background and has been investing and trading for over 15 years. He employs conservative strategies in assessing equities and appraising value while minimizing downside risk. His decisions are based in part on management, growth prospects, return on equity and price-to-earnings as well as macroeconomic factors. He is an investor who seeks opportunities whether on the long or short side and believes in changing positions as information changes.