Has the leading stock in optical communication fallen into a "golden pit"? JP Morgan talks with Ciena (CIEN.US) management: AI reasoning ignites optical network upgrades, with order visibility reaching 2027.

With the acceleration of large artificial intelligence models from "centralized computing power training" to "distributed computing power cluster" and "edge inference applications", the global optical network hardware infrastructure is undergoing an epic upgrade cycle. Recently, JPMorgan Chase held a deep earnings follow-up discussion with the investor relations team of the global optical network leader Ciena (CIEN.US), including Gregg Lampf and Patti Trautwein. JPMorgan Chase pointed out in a subsequent research report that Ciena, with its industry-leading 1.6T wide area network solution WaveLogic 6, has successfully penetrated the core supply chain of ultra-large-scale data centers, with a backlog of orders totaling as high as $7.7 billion demonstrating strong performance leadership. The three main drivers of service providers stepping on the gas pedal: MOFN fully expanding to the US domestic market Ciena management pointed out that the strong growth of service providers is mainly driven by the following three core logics: Infrastructure gap filling: In the past few years, traditional telecom and network service providers' investment focus has been highly concentrated on 5G capital expenditures, resulting in long-term underinvestment in underlying fiber optic infrastructure. Operators are making full efforts to make up for the gap in basic network construction that has occurred since the COVID-19 pandemic. Managed optical fiber network (MOFN) explosion: To support the massive data interconnection (DCI) demands between AI data centers, service providers are actively deploying MOFN, which currently accounts for about 15% of Ciena's service provider-related revenue. Capturing AI inference traffic: Operators are overhauling their network architecture to ensure that their network will not become a "traffic bottleneck" for the monetization of artificial intelligence when the future explosion of AI inference traffic occurs. It is worth noting that Ciena particularly emphasized that the previously MOFN-led capital expenditures were mainly concentrated in international regions, but now this demand is accelerating its expansion to the US domestic market. This means that the optical fiber network restructuring triggered by AI has already been fully rolled out in the US domestic market. JPMorgan Chase also stated in their research report that Ciena recently obtained Verizon's selection of the WaveLogic 6 Extreme solution and conducted a 1.6Tbps data transmission test in a real-time fiber optic network, further validating the feasibility of AI optical fiber. Order visibility extends to 2027: "Co-creation model" completely crushes repeated ordering doubts In traditional hardware cycles, the market is most concerned about customers "double ordering" during supply chain constraints leading to inflated demand. However, JPMorgan Chase pointed out that the healthiness of Ciena's current orders is extremely high, with virtually no signs of repeated ordering. This is due to Ciena's "co-creation partner relationship" with hyperscalers. In this deep binding mode, Ciena directly participates in the design of the customer's next-generation network architecture, while the customer fully opens up its future product roadmap to Ciena. The confidence of the management team in the $7.7 billion order backlog comes from this: these orders are not "panic hoarding" during the pandemic, but rather for direct on-site deployment. If Ciena is able to deliver early, customers will order more - with almost no signs of repeated ordering. This deep collaboration allows Ciena to clearly control the order process based on specific projects, with visibility extending all the way to 2027. Currently, the company has a total order backlog of $7.7 billion, and this number is expected to continue to grow in the 2026 fiscal year. At the same time, the conversion speed is astonishing, with about 80% of the hardware backlog orders valued at $6.4 billion expected to be delivered within the next 12 months, demonstrating extremely high order realization efficiency. WaveLogic 6 shines: seizing DSP business, RLS system wins large orders in advance On the technical side, Ciena is using its technological edge to implement a "dimensional strike" against competitors. With the latest WaveLogic 6 (WL6) coherent optical technology, Ciena successfully wrested away the core business of digital signal processors (DSP) from a global leading hyperscale data center operator that had been using industry-standard components for fiber optic transmission. WaveLogic 6, as the world's only 1.6T wide area network (WAN) solution, successfully helped the customer transition to the next generation AI workload network. In the 2026 battle for the 800G coherent pluggable market, system equipment vendors are determined to aggressively gain market share, leading to intensified competition. Ciena, with its WaveLogic 6 symbol rate and high-performance DSP differentiated design, holds a leading advantage in the industry. Ciena has received the industry's first "multi-track" system order (RLS Hyper-Rail solution) from a top hyperscale cloud provider for remote AI training. Additionally, in the highly anticipated remote AI training scenario, Ciena has won the first order for the RLS Ultra-high-speed rail system sooner than expected. The company's executive advisors emphasized that for transmission distances exceeding approximately 1000-2000 kilometers, the RLS system will use complete modems instead of pluggable modules, increasing the proportion of photon devices in the total components and creating more revenue opportunities. The RLS Hyper-Rail is expected to be standardized by the end of 2026 and fully launched in 2027. The company has initiated discussions with most major hyperscale vendors for similar deployments. This platform uses a unique long-distance optical amplification architecture and is expected to support cross-campus interconnection of AI training clusters with significantly improved spatial and power efficiency. Financial perspective: vertical integration drives higher-than-expected gross margins, variable compensation lifts short-term Opex Driven by a strong product portfolio, Ciena's performance in the second quarter of the 2026 fiscal year and the gross margin guidance for the third quarter significantly exceeded Wall Street's expectations. The expansion of the Q2 gross margin to 44.9% was mainly driven by three factors: continuous optimization of the product portfolio, increased proportion of high-value products; cost reduction measures on the design side; and upward pricing power (due to supply shortages), with the effective pricing increase happening about half a year earlier than previously expected. Operating expenses (OpEx) growth is almost entirely driven by variable compensation - orders and revenue exceeded expectations, and variable compensation expenses compensated for the increased Q2 costs. Excluding compensation fluctuations, the management believes the operating model is highly efficient. Due to the shared R&D resources for various product forms and solutions of WaveLogic, the operational leverage effect is very significant. In addition to the high value-added premium brought by WL6, the company is also accelerating its vertical integration. For example, the company has already integrated the ITLA pump laser into internal production and plans to replicate vertical integration in the online system field to solidify control over supply chain costs further, potentially enhancing the logic of gross margin expansion. The table below shows Ciena's latest operational and financial forecast changes: "Outstanding performance but stock price decline": Market is ahead, but fundamental support remains unchanged In sharp contrast to the strong fundamentals, Ciena's stock price fell by approximately 13.66% after last week's earnings report, with volatility reaching 14% at one point. The fundamental reason for this retreat is the extreme "overrunning" of valuation - prior to the financial report, Ciena's stock price had risen by over 600% in the past year, nearly 200% since the beginning of the year, with a forward price-to-earnings ratio approaching 90 times. Currently, the company's stock price is at $445. Even after the pullback, the current price-to-earnings ratio (TTM) remains high. However, market sentiment is undergoing a recovery: as of June 10th, analysts' overall rating remains "buy" (13 buy, 6 hold); the average target price is approximately $559; several institutions, including UBS ($508), Morgan Stanley ($490), and Rosenblatt ($720), collectively raised their target prices after the financial report. The "outstanding performance but stock price decline" essentially reflects a shift in the pricing logic of AI infrastructure targets from "whether growth can be realized" to "whether growth potential has been fully priced in" - this phenomenon is not unique in the optical communication sector. Ciena's financial report sends the strongest signal not just in quarterly data but also in the structural shift happening in AI investments: the larger the computing power cluster, the higher the demands for data transmission speed, density, and latency - the bottleneck in large-scale cluster construction is gradually shifting from chip computing capability to network transmission bandwidth. Capital expenditures of hyperscale cloud providers are expected to surpass $720 billion in 2026, driven almost entirely by the demand for AI infrastructure. The management forecasts that the total market size will double to approximately $50 billion by 2029. This growth not only includes the traditional wide area network market but also includes high-growth markets within and around data centers - such as the scale-out and scale-up interconnect inside data centers, where copper cable solutions are nearing their limits in short-distance interconnects, and optical interconnects will play a larger role in connecting both inside and outside cabinet connections.