Ciena's (CIEN) entry into the merchant optical chip market through partnerships poses a challenge to some of its competitors, analysts say.
Ciena announced a strategy Monday at the Optical Fiber Communication (OFC) exhibition in Los Angeles that noted alliances with Lumentum Holdings (LITE), Oclaro (OCLR), and NeoPhotonics (NPTN). Those relationships could give it a leg up over Inphi (IPHI) and Acacia Communications (ACIA).
While analysts cheered the move in reports released today, they do not expect revenue upside from Ciena's chip strategy until late 2018 or early 2019.
Ciena, a maker of fiber-optic communications infrastructure, develops its own chip technology for in-house products, much like Cisco Systems (CSCO). By selling optical chips to Lumentum, Oclaro, and NeoPhotonics, "Ciena is better positioned to target the more than 30% of the ($900 million) market that uses modems based on merchant silicon," said Tim Long, a BMO Capital analyst in a report.
Lumentum Holdings, Oclaro, and NeoPhotonics are expected to build modules that plug into communications subsystems using Ciena's chips.
"Ciena's move is a direct challenge to Acacia, NEL (NTT Electronics), and Inphi's ClariPhy unit," said Alex Henderson, a Needham & Co. analyst in a report.
IBD'S TAKE: Inphi is rated No. 1 in IBD's Sector Leaders while Applied Optoelectronics and Lumentum hold the highest Composite Rating, a CAN SLIM investing metric, in IBD's Telecom-Fiber Optic group. The oft-volatile fiber-optic group is ranked No. 12 out of 197 industry groups.
Ciena, which builds higher-margin system-level products, doesn't compete directly with component makers. Ciena rivals include the likes of Cisco, Huawei, Juniper Networks, and ZTE.
Meta Marshall, analyst at Morgan Stanley, says Ciena could make inroads into China, where Acacia Communications is a chip supplier to ZTE and Huawei.
"Ciena has increasingly been looking for ways to diversify their revenue sources, something today's announcement reinforces," said Marshall in a report.
James Kisner, a Jefferies analyst, says Ciena's chips are expected to be built into modules for next-generation network gear sending data at 400 gigabits-per-second. Most customers of fiber-optic companies are upgrading to 100 Gbps technology currently.
Ciena stock fell 0.9% to 23.53 in the stock market today, reversing from morning gains along with the major market averages. Ciena stock fell in early March after it reported fiscal first-quarter revenue and non-GAAP profit that missed expectations.
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