Shares of optical networking equipment maker Ciena Communications (NYSE: CIEN) were down by 13.5% as of 11:15 a.m. ET Thursday, despite the company delivering expectations-beating results on both sales and earnings in the quarterly report it released before the opening bell.
Heading into earnings day, analysts had forecast Ciena would earn $0.48 per share (adjusted for one-time items) on sales of $1.02 billion in its fiscal 2024 first quarter. The actual numbers: $0.66 per share on sales of $1.04 billion.
Why investors are selling Ciena stock
So why are investors selling Ciena on a top- and bottom-line beat?
Well, for one thing, Ciena didn't actually earn $0.66 per share -- not according to generally accepted accounting principles (GAAP), at least. In fact, although CEO Gary Smith boasted of Ciena's "solid fiscal first quarter results, including strong profitability," GAAP earnings in fiscal Q1 were only $0.34 per share -- down 34% year over year. At the same time, sales declined by a fraction of a percent, yet that resulted in a big decline in earnings.
Admittedly, not all the news from Ciena was bad. Both its gross margin and operating profit margin increased, and the real reason earnings declined was because the company paid more interest on its debt, and earned less interest on its bank balance. Essentially, its decline in profits can be attributed almost entirely to these interest rate fluctuations.
Is Ciena stock a sell?
Turning to guidance, TheFly.com quotes Ciena executives predicting that gross margins in Q2 will fall below Q1 levels to the "low 40% range" before returning to Q1's mid-40% margins later in the year. That sounds OK ... but for the fact that Ciena is predicting its total sales in 2024 will not return to 2023 levels.
Management is forecasting fiscal 2024 sales in a range of $4 billion to $4.3 billion. That's less than the $4.4 billion in sales Ciena raked in during fiscal 2023, and much less than the $4.5 billion in sales that analysts had been anticipating.
Long story short, Ciena seems to be saying it will collect less revenue this year than last year, but might make up for that with stronger gross margins. That would probably add up to flat earnings. But Ciena stock still trades for a pricey 36 times earnings, even after Thursday morning's share price decline. For that kind of premium, investors want something more than flat results.
This, in a nutshell, is why they're selling Ciena stock.
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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.
