Morgan Stanley Downgrades Ciena Corporation After 20% Jump Last Month

Morgan Stanley has downgraded Ciena Corporation CIEN to Equal Weight from Overweight on valuation as shares surpassed the brokerage's $23 price target.

Shares of Ciena have gained 20 percent in the last month and closed 8 percent higher on Thursday at $23.17 following better-than-expected third-quarter results, driven by top-line growth, cost controls and strong gross margins. The brokerage maintains its $23 target.

"Ciena's results highlighted increasing diversification of growth drivers and benefits of continued opex discipline. While we are encouraged by diversification and reduced volatility we think valuation has largely caught up with the current opportunity," analyst Meta Marshall wrote in a note.

Related Link: Ciena Stock Drops After Q3 Sales Miss

Marshall is "encouraged" with Ciena's traction with new customers and categories such as packet networking and webscale. This traction would bring consistency to the results and help the company outgrow the market in the near-term. However, the analyst doesn't see this as compelling for the multiple expansion given tough competition within optical segment.

"Given optical remains an intensely competitive space, our view on product gross margin and operating margin growth is limited, but we do think Ciena's 15 percent operating margin target is potentially achievable during periods during peak cycles (FY17 and FY18), but $1.5–$2 remains the more normalized earnings power," Marshall continued.

The analyst cut his fourth-quarter and FY17 estimates. Marshall now expects fourth quarter/FY17 revenue and EPS of $716 million/$0.44 and $2.788 billion/$1.71 versus prior estimate of $723 million/$0.48 and $2.823 billion/$1.77.

"We could turn more positive were the pace of international wins to increase or software growth (Blue Planet) to help meaningfully improve gross margins," Marshall added.

Full ratings data available on Benzinga Pro.