Thanks to a fashionable new method of comparing richly valued stocks, Ciena ( CIEN) shareholders today find themselves several billion dollars richer than they were just last month. After shriveling last year under the weight of a failed merger with Tellabs ( TLAB) and the onset of competition from large suppliers, Ciena stock has quintupled this year, jumping 64% since Dec. 1 alone. On Friday, Ciena beat profit expectations, pushing its stock up 10 5/16, or 17%, to 71 7/8. Bulls -- and they are many -- note that Ciena has shored up its business by broadening its customer list, upgrading products and acquiring builders of more advanced fiber-optic technology. But more than management, technology or market position, Ciena owes its stubborn rise to a risky, self-perpetuating mindset among analysts and investors in today's bull market: relative valuations.
Apples, Oranges and Pomegranates
By this thinking, Ciena shares are undervalued because other optical suppliers have fetched greater price tags. For example, Cerent, an optical start-up with $10 million in total reported sales, fetched a juicy $7 billion price tag when it was acquired by Cisco ( CSCO). Sycamore Networks ( SCMR), equally unproven, has achieved a market value of $18 billion since issuing stock in October. According to this paradigm, Ciena's $9.8 billion market cap, coming as it does on latest-year sales of $482 million, is meager by comparison. "We believe Ciena shares should trade at a valuation more in line with some of the other highflying optical-equipment manufacturers," wrote Steve Levy, equity analyst with Lehman Brothers, in a research note Thursday. Levy upgraded Ciena to buy, setting a price target of 110, or 13 times the revenue he expects in 2000. "If you believe as we do that Ciena has next-generation technology, then you should be buying it," says Jeff Diecidue, portfolio manager with Unicom Capital, who wouldn't say what stocks his firm owns. The rising trend in optical stocks "argues for a higher valuation for Ciena."
Nuts and Berries
Ciena launched itself into Sycamore's optical sphere this year by committing about $1 billion in stock to buy privately held Omnia Communications and Lightera Networks. In a conference call Friday, Ciena CEO Patrick Nettles said he is "still comfortable" that these units will add $50 million to $100 million to Ciena's revenue in the fiscal year ending in October 2000. For that year, analysts are looking for revenue of about $700 million. But technology aside, other professionals see trouble in the comparative approach. "Analysts are starting to get more and more into this type of analysis," says Barry Hyman, chief market strategist with Ehrenkrantz King Nussbaum, a money manager in New York with no positions in Ciena. They "have to stretch their rubber band a little more to reach their expanded objectives." Rising stocks just prompt the pros to "go back to the office, give the old metrics machine another few cranks and produce another price target," says Bill Meehan, chief market analyst with Cantor Fitzgerald. "'Relative' is Wall Street's favorite word," Meehan continues. "It's not uncommon to hear people say, 'Well, relative to a Yahoo! ( YHOO), Microsoft ( MSFT) is dirt cheap.'" Meehan has no positions in the stocks discussed.
Show and Tell
Even the fundamental story's a bit of a hard sell at these levels. Friday's profit report mostly served to confirm Wall Street's already bullish expectations. Late Friday, no analysts had raised their estimates with First Call/Thomson Financial. The mean profit estimate is 51 cents per share in the fiscal year ending in October 2000, compared with 3 cents a share excluding charges in fiscal 1999. In recent months, investors have crammed all the optimism they can into the stock prices of companies such as Sycamore and Ciena, which promise to help telephone carriers and ISPs ease traffic bottlenecks with systems that cram lightwaves into glass fibers. Levy finds Sycamore, for example, "fairly valued" at 230, or about 144 times his 2000 revenue forecast -- even though he expects Sycamore to show its first penny of profits, and it'll be just a penny per share, in the fourth quarter of 2000. (Levy rates Sycamore hold, and his firm underwrote Sycamore's offering but has no banking ties to Ciena.) He couldn't be reached for comment Friday. But comparisons aside, skeptical observers keep coming back to one thing. "The businesses don't change that rapidly," says Meehan. Rather, "the metrics change."