Ciena Skeptics Emerge
That's what stock analysts have been asking lately, as Ciena shares have held up better than other players in the midst of the telecom spending slump. Merrill Lynch & Co. Inc. was the latest to downgrade Ciena shares as it changed its rating on the stock today from Accumulate to Neutral.
Merrill Lynch analysts Michael E. Ching and Simon M. Leopold remain bullish on Ciena's technology, but lately they’ve been spooked by Ciena's peers and the market downturn in general. "It is now clear to us that no matter how good a product is, it is unlikely that market share gains will be enough to offset the market declines that we are now forecasting in this environment," their report states.
So, while the analysts see Ciena growing between 40 and 60 percent faster than the optical systems market in general, they think the market will "decline in 2001 and remain flat in 2002."
Merrill Lynch’s move follows a May 23 downgrade by Morgan Stanley Dean Witter & Co. and an April 27 downgrade by Salomon Smith Barney. In each case, the analysts spoke admiringly about Ciena’s technology and long-term prospects but hedged their comments with concerns about spending in long-haul networks and the tendency for carriers to suspend or delay orders.
Interestingly, though, Ciena has yet to turn in a disastrous quarter and the firm keeps scrounging for positive news (see Ciena Struts Its Stuff). It announced today that Telecom Developpement (TD), a French service provider, will continue a relationship it has had with Ciena since 1998 -- one that keeps Ciena as a supplier of long-haul gear for its 30-city network (see Ciena Wins French Contract).
In a sense, the company does look exposed to the telecom weakness. Its next-generation DWDM switching product, the CoreDirector, has been enormously successful. But that only accounts for about 10 percent of the company's revenue. Most of its business comes from systems that are targeted at long-haul networks. And that's one of the areas experiencing the sharpest drop-off in the telecom sector.
Shares of Ciena dropped $0.94 (2.5%) to 35.80 in early afternoon trading. Ciena’s third fiscal quarter for 2001 ends on July 31.
- Phil Harvey, Senior Editor, Light Reading