CIEN has been under pressure ever since its earnings gap higher in early June, back near the 52 week low of $18:
Back in early June, we entered a slightly bullish call calendar that we exited for a small gain after earnings. Our rationale for the upside bet was that CIEN’s valuation reflected much of the bad news (particularly surrounding telecom spending and AT&T, Ciena’s largest customer), and the risk/reward was skewed to the upside.
The persistent selling since the earnings bounce has been in part due to weak guidance from networking competitors in the past month. JNPR’s report disappointed expectations in late July, though it’s worth noting that much of the weakness in JNPR’s report was on the enterprise side as opposed to the service provider side of the business. For the uninitiated, here is JNPR’s own definition:
The service provider market generally includes wireline and wireless carriers, and cable operators, as well as major Internet content and application providers, including those that provide social networking and search engine services. The enterprise market is generally comprised of businesses; federal, state, and local governments; research and education institutions; and financial services.
CIEN is more exposed to the service provider market, so the read-through is less negative.
The stock’s weakness today is attributed to weak guidance from JDSU last night, and JDSU is selling off to near a 52 week low post-earnings today. JDSU management did provide some specifics on the conference call.
On the cable side, our business has been real healthy. So I don’t think that up to this point we’ve really being impacted by what’s being discussed as far as the merger out there. I think on the telco side with major North American operator, we have seen some pullback as a result of both the architectural changes going on and also intended merger. So I think that has impacted the telco side of the business in North America.
The potential weakness in telecom spending in the past few months could be a concern for CIEN, as that’s the sector to which it is most exposed. Of course, at this point, how much bad news is priced into the stock near the lows? CIEN is relatively cheap if management can show that last quarter’s solid number was no fluke. The next earnings report is in early September, and the bar has been raised according to analyst estimates (12% year-over-year sales growth and 25% yoy EPS growth). I’m just watching the chart for now, but I might look for a September options structure if CIEN tests the $18 low.