Why Ciena Shares Soared 5% Monday

Ciena (CIEN 4.82%) the stock was up 4.9% by 10:10 a.m. ET Monday after the investment bank City Group switched from sell to buy on the stock this morning and raised its price target to $68.

Capital spending by North American telecom companies will likely end 2024 down 3% from 2023 levels, the analyst explained. But in 2025, this trend should reverse to show a 3% increase in capital spending.

Why Citigroup Loves Ciena Stock

More details on the upgrade: Ciena’s stock is suffering from an oversupply of telecom equipment, which is weighing on depressed sales and profits. Last quarter, Ciena’s sales fell 12% year over year, while earnings fell 52%.

However, as StreetInsider reports today, the excess inventory is having a “diminishing impact” on Ciena’s business, and as demand for the company’s products recovers, Ciena could enjoy mid- to single-digit sales growth. 2025 – just above the industry average.

The analyst notes that Ciena’s huge role in supplying network equipment to cloud service providers will help drive growth. Additionally, the analyst expects investors to start shedding semiconductors in search of cheaper ways to play the rise of artificial intelligence technology.

Is Ciena stock a buy?

On that note, it’s important to note that Citi doesn’t expect Ciena to immediately benefit from the AI ​​work. This is more of a long-term trend for stocks. And in the near term, I’m not convinced that the stock’s price-to-free cash flow ratio of 30 times FCF is cheap enough for a mid-to-single-digit sales growth forecast.

What’s more, when you consider that the stock is selling at an even more expensive-looking P/E ratio of 61.5 — a more common valuation measure — the case for buying Ciena stock today looks even weaker. Just because Citi might be right about improving telecom equipment sales doesn’t mean it’s right to buy Ciena stock.