The increasing demand for artificial intelligence means that data centers and telecommunications companies need their connectivity to operate at extremely fast speeds, benefiting companies such as Ciena (NYSE: CIEN).
A networking company, Ciena’s products are emerging as a critical tool for its customers, including telecommunications companies such as AT&T (NYSE: T) and Verizon Communications (NYSE: VZ) who are upgrading their network or hyperscalers which are massive cloud service providers such as Amazon (NASDAQ: AMZN) or Alphabet’s Google (NASDAQ: GOOGL) that are building more capacity.
Bandwidth demands skyrocket from data centers
Demand for networking services has taken off rapidly for data center providers. Investors have expressed a strong interest in networking companies, sending shares of Ciena up by 744% during the past five years, with nearly all of that gain, or 720%, occurring during the past year.
Ciena reported a strong fiscal first quarter with revenue rising to $1.43 billion, up 33% year-over-year, while adjusted earnings per share (EPS) were $1.35, a growth of 111% compared to the fiscal first quarter of 2025.
The company expects that demand will continue to grow, estimating that revenue will reach $1.5 billion plus or minus $50 million for the fiscal second quarter of 2026 and increased its revenue guidance range for fiscal year 2026 to $5.9 billion to $6.3 billion, a 28% increase year-over-year at the midpoint.
The stock was upgraded to buy by BofA Securities, which raised its price target to $355 a share in March from $260 a share, according to a research note.
The amount of money budgeted for networking used to be more cyclical, but now cloud providers are allocating a larger chunk of their capital expenditure for networking solutions because booming data center construction has changed that guidance.
“Cloud spending on optical remains robust, with cloud providers adding significant [data-center] capacity in the next three years,” wrote Tal Liani, a BofA Securities analyst. “We define the current cycle as a super-cycle and expect it to continue well into 2027.”
From optical networking to routing and switching, Ciena is becoming a powerhouse for its hyperscaler customers who sometimes need to spend hundreds of millions of dollars to connect their data centers together to share information, according to Atif Malik, an analyst for Citi.
While Ciena’s value appears high at a $67.8 billion market cap, “this valuation is warranted” due to the potential for Ciena to increase its revenue, he added, increasing his price target to $345 a share in March from $280 a share.
To meet increased bandwidth demands, Ciena’s customers are investing in networking capabilities, not just semiconductor chips to add compute power.
Supply chain constraints
High-speed connectivity has become a necessity in order for more companies to adopt AI and increase their own productivity. One roadblock that Ciena is facing is meeting demand and requiring more components.
“Ciena is at the right place at the right time, offering its superior 1.6 Tb/s optical solutions as hyperscaler, neo-cloud, and data center capital expenditures grow at an astronomical rate,” wrote Mark Giarelli, an equity analyst for Morningstar.
The gap between the demand of its customers for its products and manufacturing capacity is rising, he said.
“Ciena is heavily supply-constrained, with the primary bottlenecks being optical and photonic components, which very few suppliers can manufacture at scale,” Giarelli said.
The company plans to nearly double its capital expenditures this year to build manufacturing capacity, even though capex only consists of 4% to 5% of sales.
Ciena added $2 billion in orders in the fiscal first quarter, which increased the total backlog to $7 billion.
“While this is a robust sign of customer demand, we remain wary of the time needed to work through the backlog,” he said. “Competitors may take a portion of these orders if Ciena cannot uncap its supply quickly.”
But Barclays points out that Ciena has substituted some of the components, changed suppliers’ contracts, and has been cutting costs. The investment bank recently increased its price target in March to $372 a share from $279.
Ciena has a foothold with hyperscalers and telecom service companies and is positioned to be the supplier they favor.
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