Ciena Corporation's (NYSE:CIEN) 25% Dip Still Leaving Some Shareholders Feeling Restless Over Its P/SRatio

Ciena Corporation (NYSE:CIEN) shareholders won't be pleased to see that the share price has had a very rough month, dropping 25% and undoing the prior period's positive performance. Still, a bad month hasn't completely ruined the past year with the stock gaining 27%, which is great even in a bull market.

In spite of the heavy fall in price, when almost half of the companies in the United States' Communications industry have price-to-sales ratios (or "P/S") below 1.4x, you may still consider Ciena as a stock probably not worth researching with its 2.4x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

See our latest analysis for Ciena

What Does Ciena's P/S Mean For Shareholders?

Ciena could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. It might be that many expect the dour revenue performance to recover substantially, which has kept the P/S from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

Want the full picture on analyst estimates for the company? Then our free report on Ciena will help you uncover what's on the horizon.

Is There Enough Revenue Growth Forecasted For Ciena?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Ciena's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 8.4% decrease to the company's top line. Regardless, revenue has managed to lift by a handy 11% in aggregate from three years ago, thanks to the earlier period of growth. So we can start by confirming that the company has generally done a good job of growing revenue over that time, even though it had some hiccups along the way.

Looking ahead now, revenue is anticipated to climb by 9.9% during the coming year according to the analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 10%, which is not materially different.

In light of this, it's curious that Ciena's P/S sits above the majority of other companies. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as this level of revenue growth is likely to weigh down the share price eventually.

What Does Ciena's P/S Mean For Investors?

Ciena's P/S remain high even after its stock plunged. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Given Ciena's future revenue forecasts are in line with the wider industry, the fact that it trades at an elevated P/S is somewhat surprising. Right now we are uncomfortable with the relatively high share price as the predicted future revenues aren't likely to support such positive sentiment for long. A positive change is needed in order to justify the current price-to-sales ratio.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Ciena that you need to be mindful of.

If these risks are making you reconsider your opinion on Ciena, explore our interactive list of high quality stocks to get an idea of what else is out there.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.