Investing.com -- Ciena (NYSE:CIEN) is due to report its fiscal first-quarter results on Thursday, with analysts keen to see how a surge in enthusiasm around artificial intelligence has impacted demand at the networking equipment provider.
Ciena stock forecast
The Maryland-based group's stock price has risen by more than 35% since it reported October quarter results that topped estimates thanks largely to strength at its web-scale unit, which aims to help clients cope with what Ciena described as a "massive explosion" in online traffic. Revenue also grew sharply in the Asia-Pacific region, especially in India.
In a note on Tuesday, analysts at JPMorgan said that Ciena's upcoming results could help justify not only its increased valuation, but also verify if the AI hype has supported demand for its optical fiber cables that allow data to be passed through a network.
"[I]nvestors are expecting the AI investment cycle to lead to upside for Ciena's near-term guidance, and in particular stemming from better Cloud orders even as [telecom] orders remain soft," the JPMorgan analysts wrote.
"That said, the reliance on the near-term results and upside are a lot lower than the focus on the bull case, which involves in addition to the AI investment cycle, the opportunities for Ciena in the Routing and Broadband markets, and we expect shares of Ciena to continue to hold a valuation premium to its historical trading multiple on that account."
Potential headwinds loom, however. Ciena Chief Executive Gary Smith has flagged that many services providers, particularly in North America, are at "various stages" of working through inventories due to macroeconomic forces like elevated borrowing costs and high inflation.
Speaking in a post-earnings call in December, Smith predicted that there would be "some cleanup" in inventories in the first half of the year, adding that its largest customers are steadily "absorbing and being able to get deployments of the stuff that we've shipped to them."
Some investors have still fretted that the backlog may not be replenished quickly enough, according to analysts at Madison Funds, although they argued these fears were "unjustified."
"[We] continue to like this business in the long run as this business is an underappreciated beneficiary of AI infrastructures build outs," the Madison Funds analysts said.
But analysts at Evercore ISI noted that Ciena may present a conservative full-year outlook, citing uncertainty around when this normalization in service provider inventories may occur.
"Timing of the [service provider] recovery looks like it will be the key swing factor for Ciena this year and we think they will raise the guide once they have confidence on the timing of the recovery," the Evercore ISI analysts said. "Fundamentally, service providers will have to return to spending on optical equipment in order to keep up with bandwidth growth and take advantage of government broadband programs."
AI Infrastructure Companies
Investment has recently been pouring into developing the infrastructure needed to support AI-fueled applications, especially the data centers where the high-performance servers propping up the technology are stored.
The JPMorgan analysts are predicting that 2024 will be a year of "record new data center builds" as more companies push to expand their AI capabilities. Demand for data center interconnect equipment -- or the gear needed to link multiple sites -- could subsequently rise, the analysts said, adding that this could prove to be a boost for Ciena.
""[W]e expect the higher spend towards [data center interconnect] in 2023 to be followed by another robust year of spend in 2024 [...] particularly as new data centers are brought online," the analysts said.
However, a global survey of business leaders conducted by MIT Technology Review Insights and Australian telecoms group Telstra (OTC:TLGPY) found that only 9% of respondents were significantly using AI, CNBC has reported. Less than 30% said that they had confidence in their IT infrastructures to support the technology.
Meanwhile, more than half said that limited IT investment budgets were a reason for not immediately launching products featuring so-called generative AI, CNBC reported.
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