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Investing.com -- Shares of Ciena Corporation (NYSE:CIEN) rose in pre-market trading on Monday after Citi analysts upgraded the stock to "buy" from "sell" and raised the price target to $68 from $44.

The upgrade reflects growing optimism from Citi, regarding Ciena’s improving fundamentals and brighter growth outlook for 2025.

Citi’s analysts cited the diminishing impact of the prolonged excess inventory and weak demand in the telecommunications and cable sectors, which had weighed heavily on Ciena’s performance. 

As per Citi, this overhang is beginning to lift, setting the stage for a return to mid-to-high single-digit growth for the company in fiscal year 2025. 

While Ciena has lagged behind competitors like Arista Networks (NYSE:ANET) and Coherent (NYSE:COHR) Corp, which have outperformed it by a 3-to-1 ratio year-to-date, Citi believes the tide is turning. 

The analysts expect a rotation of investor interest back into the networking equipment sector over the next six months, as the extended semiconductor and hardware rally cools.

A key factor driving Citi’s confidence is the gradual improvement in bookings from North American telecommunications and cable providers, which represent about 50-60% of Ciena’s sales. 

Citi noted that consensus capital expenditure expectations for North American telcos have shifted positively, improving from a predicted 3% decline for fiscal 2024 to a 3% growth forecast for 2025. 

This change signals healthier spending by service providers, which should help boost Ciena’s top line.

In addition to improving telco and cable market conditions, Citi highlighted Ciena’s strong momentum in cloud service provider bookings. This growth, particularly evident in fiscal year 2024, has helped offset weaknesses in telecommunications, giving Ciena a solid foundation for web-scale sales growth heading into 2025. 

While Ciena’s opportunities in artificial intelligence are expected to materialize further down the line, Citi remains optimistic about the long-term benefits as data traffic from AI applications expands.

Citi also revised its earnings estimates for Ciena, raising the company’s earnings per share (EPS) forecast by 5% for fiscal 2025 and by 10% for fiscal 2026. 

This increase, coupled with better business visibility, led Citi to raise its valuation multiple on Ciena from 16x to 19x forward price-to-earnings (P/E), which supports the updated price target of $68. 

The revised target reflects a premium over Ciena’s three-year median P/E ratio, justified by the company’s improving fundamentals and clearer growth prospects.

However, the analysts did caution, however, that while there is potential upside from faster-than-expected AI data center expansion and market share gains in routing and switching, risks remain. 

Slower recovery in telecom and cable service provider spending, as well as potential losses in the Metro (TSX:MRU) and Data Center Interconnect optical markets, could challenge Ciena’s ability to fully capitalize on the improving market trends.

Shares of the company rose 3.4% in pre-open trade on Monday.

This content was originally published on http://Investing.com