Can You Hear Me Now? 5G Is Here

It’s been billed as “world-changing.” Described as a “quantum leap,” and the “next big thing.” But will it live up to these lofty expectations?

This new technology is still in its infancy so it’s hard to give a concrete answer at this time. But one thing we do know is that even if it weren’t to exactly live up to or exceed the hype it’s currently receiving, investors stand a chance to make spectacular gains.

That’s because billions… even hundreds of billions of dollars are being spent to develop the next generation of wireless networks — more commonly known as “5G.”

I don’t need to tell you that 5G has considerable momentum behind it. When we talk about 5G, what immediately comes to mind are the speeds at which our smartphones can operate. And, of course, we will be able to surf the web at a faster clip and download movies in a matter of seconds.

But 5G isn’t just about speed. It’s about pervasiveness, capacity, durability, intelligent machines, privacy, security, and a ton of new standards. It’s much more than just our cellular devices.

This “upgrade” of our communication network will blindside every industry and business.

5G is expected to be anywhere from 10 times to 100 times faster than the current iteration of 4G. For instance, you’ll be able to download a season’s worth of Yellowstone in a matter of seconds.

When looking for investment opportunities in this space, a good place to start is finding the companies that will be critical to upgrading the communication network. And I’ve found such a company…

Ciena Corporation (CIEN) is a network and communication infrastructure company with a specialty in optical transport — a critical piece of the puzzle in order to achieve the speed and performance that 5G boasts.
Over the last 10 years, Ciena has quickly gained market share and at the end of 2019 controlled close to a quarter of the optical hardware networking market outside of China.
Despite the dominance, Ciena’s revenues haven’t grown at the incredible clip that we’ve seen from other technology companies. Last year, Ciena pulled in $3.6 billion in sales — a solid 15.4% increase over 2018. Over the last five years, it’s grown revenue at an average annual rate of 9.3%.

Don’t get me wrong, that’s strong sales growth… it’s just not the astronomical revenue growth that we’ve seen from other companies in the tech space.

But Ciena has plenty of tailwinds to greatly improve those figures – which, in turn, should buoy share price — as the company is sitting on a multibillion-dollar revenue opportunity. The optical network market was worth just over $23.6 billion in 2019 and is expected to hit $56 billion in revenue by 2025, according to Mordor Intelligence. That translates into a compound annual growth rate of 15.4%, indicating that Ciena could ramp up the modest pace of its revenue growth that it’s currently clocking.

As sales inflate, so will profits. To be sure, the company is already comfortably in the black. It cranked out $253.4 million in net income in 2019 and is on pace to crush that number in 2020. Through the first three quarters of 2020, it’s increased net income by 85% compared with the same quarter last year, 74% in Q2, and 64% in Q3. In fact, through the first three quarters, it’s already topped last year’s figure by $43 million.

The story is similar when we look at the cash flow statement. Cash from operations in its most recent quarter (the three months ended July 31) came in at $180.3 million, an eye-popping 117% improvement over the same period in 2019. After accounting for capital expenditures, we are left with free cash flow of $164.4 million.

Management has done this all without bloating the firm with debt, too. At the end of July, Ciena had nearly $1.2 billion in cash on hand and total debts of $821 million. So, it sports a strong balance sheet to top off its stellar financials.

Astonishingly enough, though, Ciena’s shares aren’t trading for the sky-high valuations that you see with many other technology companies. In fact, they’re changing hands at half of what the average company in the S&P 500 is going for.

Ciena currently sports a price-to-earnings (P/E) multiple of 17.1. Meanwhile, the S&P 500 sports a lofty P/E of 35.3.

In short, Ciena is offering us an opportunity to invest with essentially a company that will be part of the backbone of the burgeoning 5G trend, and at a really good price. That’s not to say it will be a smooth ride to profits, as when there’s big money being thrown around it will attract a lot of competition. But Ciena already commands nearly a quarter of the market share, is number one or two in multiple markets in which it operates, and boasts a strong clientele including AT&T, Verizon, Lumen Technologies, and Vodafone Group.

Action to Take: Consider buying shares of Ciena under $45. Book a third of your gains when you’re up 50%. Look to take more profits off the table when shares have doubled.