Priced at 30 times free cash flow and a P/E ratio twice that, Ciena stock remains expensive — no matter what Citigroup says.
Ciena (CIEN 4.57%) stock ran up 4.9% through 10:10 a.m. ET Monday after investment bank Citigroup switched from sell to buy on the stock this morning, and raised its price target to $68.
Capital spending by North American telecommunications companies is likely to end 2024 down 3% from 2023 levels, explained the analyst. But in 2025, that trend should reverse to show 3% growth in capital spending.
Why Citigroup loves Ciena stock
More details on the upgrade: Ciena stock has been suffering from a supply glut of telecom equipment that’s weighing on sales and depressing profits. Last quarter, Ciena’s sales slid 12% year over year, while earnings cratered 52%.
As StreetInsider reports today, though, the inventory glut is having a “diminishing impact” on Ciena’s business, and as demand for the company’s products revives, Ciena could enjoy mid- to high-single-digit sales growth in 2025 — even above the industry average.
The analyst notes that Ciena’s outsize role in supplying networking equipment to cloud service providers will help drive growth. Additionally, the analyst expects investors to begin rotating out of semiconductors in search of cheaper ways to play the rise of artificial intelligence technology.
Is Ciena stock a buy?
In this regard it’s important to note that Citi doesn’t expect Ciena to benefit immediately from AI work. That’s more of a longer-term trend for the stock. And in the near term, I’m not convinced the stock’s 30 times FCF price-to-free-cash-flow ratio is quite cheap enough for a forecast of mid- to high-single-digit sales growth.
When you consider furthermore that the stock sells for an even more expensive-looking 61.5 P/E ratio — a more common measure of valuation — the case for buying Ciena stock today looks even weaker. Just because Citi might be right about telecom equipment sales improving doesn’t mean it’s right that you should buy Ciena stock.
Citigroup is an advertising partner of The Ascent, a Motley Fool company. Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
