Ciena Corporation's (NYSE:CIEN) 26% Price Boost Is Out Of Tune With Revenues

Despite an already strong run, Ciena Corporation (NYSE:CIEN) shares have been powering on, with a gain of 26% in the last thirty days. The last month tops off a massive increase of 106% in the last year.

Since its price has surged higher, when almost half of the companies in the United States' Communications industry have price-to-sales ratios (or "P/S") below 1.1x, you may consider Ciena as a stock not worth researching with its 3.2x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Ciena

How Has Ciena Performed Recently?

Ciena hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. It might be that many expect the dour revenue performance to recover substantially, which has kept the P/S from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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.

How Is Ciena's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as steep as Ciena's is when the company's growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered a frustrating 4.8% decrease to the company's top line. That put a dampener on the good run it was having over the longer-term as its three-year revenue growth is still a noteworthy 18% in total. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of revenue growth.

Turning to the outlook, the next three years should generate growth of 7.4% each year as estimated by the analysts watching the company. That's shaping up to be materially lower than the 11% each year growth forecast for the broader industry.

With this information, we find it concerning that Ciena is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

What We Can Learn From Ciena's P/S?

Shares in Ciena have seen a strong upwards swing lately, which has really helped boost its P/S figure. 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.

We've concluded that Ciena currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. Right now we aren't comfortable with the high P/S as the predicted future revenues aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Before you take the next step, you should know about the 2 warning signs for Ciena that we have uncovered.

If you're unsure about the strength of Ciena's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.