Ciena Downgraded to Underweight by Morgan Stanley Due to Near-Term Margin Concerns

Morgan Stanley downgraded Ciena to Underweight due to lower gross margins expected to impact earnings per share in the near term. The analyst notes that revenue estimates for FY26 are currently 5% higher than in March.

Title: Morgan Stanley Downgrades Ciena Amid Concerns Over Gross Margins

Morgan Stanley has downgraded Ciena (NYSE: CIEN) to Underweight, citing concerns over lower gross margins and their potential impact on earnings per share in the near term. The investment bank trimmed its price target to $70 from $73, indicating a more negative risk-reward profile for the company's shares [1].

Ciena's revenue estimates for fiscal year 2026 have increased by approximately 10% over the past three quarters, primarily driven by demand for 400-gigabit pluggable modules used in data-center interconnects. However, earnings per share estimates for the same period have declined by 4%, as these lower-margin products dilute profitability [1].

The analysts at Morgan Stanley highlighted that Ciena's shares now trade at roughly seven times above their three-year average multiple, which they see as creating a negatively skewed risk-reward profile. They expect the company to continue beating revenue estimates, buoyed by recent multi-hundred-million-dollar GPU-cluster wins, but doubt that the market will reward this topline outperformance unless gross margins improve [1].

The investment bank expects Ciena to keep beating revenue estimates but is concerned that current Street forecasts already embed significant margin expansion for FY26, leaving little room for positive surprises. Tougher comparisons at telecommunications customers in the second half of this year and continued reliance on 400ZR modules could further cap earnings growth [1].

The higher-margin 800ZR product line should help, but it is unlikely to ramp meaningfully before 2026. Morgan Stanley values Ciena at 21 times its FY26 earnings estimate of $3.33 a share, slightly below the stock’s one-year average multiple [1].

Ciena's stock slipped about 1% in midday trading after the downgrade, reflecting investor concerns over the company's margin pressures and limited near-term earnings upside [3]. The company has been pivoting into the growing market for high-speed optical interconnects, particularly pluggables used in data centers and metro networks, but this shift may be dilutive to earnings in the short term [3].

In contrast, Morgan Stanley raised its price targets on three networking peers, reflecting broader optimism around optical infrastructure [3]. This includes Corning Inc. (NYSE: GLW) with a target raised to $50 from $44, Coherent Corp. (NYSE: COHR) with a target increased to $92 from $83, and Lumentum Holdings (NASDAQ: LITE) with a target moved to $85 from $76 [3].

The downgrade highlights the challenge for Ciena in striking a balance between strategic positioning in next-generation networks and maintaining profitability—a tension that is likely to persist as competition intensifies in the high-speed connectivity arms race [3].

References:
[1] https://finance.yahoo.com/news/morgan-stanley-cuts-ciena-profit-170957675.html
[2] https://www.investing.com/news/analyst-ratings/morgan-stanley-downgrades-ciena-stock-on-margin-concerns-despite-ai-growth-93CH-4125627
[3] https://www.citybiz.co/article/715553/morgan-stanley-downgrades-ciena-on-margin-pressures-cites-limited-near-term-eps-upside/