Better Buy: Infinera Corporation vs. Ciena Corporation

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Infinera (NASDAQ: INFN) and Ciena (NYSE: CIEN) were both market laggards this year, with the former staying nearly flat and the latter dropping almost 10%. Both optical transport solution providers were cited as turnaround plays on the "super cycle" in fiber upgrades -- fueled by the surging use of cloud services, streaming media, and other data-intensive tasks -- yet they failed to impress investors.

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However, contrarian investors might be wondering if either stock could rebound later this year. Let's take a closer at the two companies' core businesses, growth trajectories, and headwinds to find out.

What do Infinera and Ciena do?

Infinera mostly provides long-haul wave division multiplexing (WDM) and subsea optical transmission systems. These systems allow telcos and other companies to boost the capacity of their long-distance networks without laying down additional fiber. Infinera also sells metro and DCI (data center interconnect) solutions, which improve connections over shorter distances.

Ciena has a more diversified business. In addition to selling optical transport solutions, it sells converged packet optical hardware, packet networking equipment, services, and software. Its services unit offers deployment, consulting, and maintenance services, while its software helps companies monitor their networks.

Which company is growing faster?

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Infinera's biggest challenge over the past year has been sluggish demand for long-haul WDM solutions. Telcos and other customers are currently investing more heavily in shorter range metro and DCI solutions, and Infinera generates much less revenue from those newer businesses.

As a result, Infinera posted double-digit annual revenue declines for four straight quarters, and analysts expect its revenue to drop 14% to $750 million this year. On the bottom line, analysts expect a non-GAAP loss of $0.56 per share this year, compared to a profit of $0.34 in 2016. However, Infinera expects cyclical demand for long haul WDM to gradually rebound, and analysts expect its revenue to rise 15% and for its loss to narrow next year.

Ciena has fared better with its diversified exposure to fiber optic components, software suites, and transport solutions for the metro and DCI markets. Last quarter, 81% of its revenue came from networking platforms, 13% came from services, and the remaining 6% came from software solutions.

Ciena also benefited from Verizon's 100G metro rollout in the US and a similar deal with Tata Communications in India. As a result, analysts expect Ciena's revenue to rise 7% to $2.79 billion this year, and for its non-GAAP earnings to rise 27% to $1.75 per share. For 2018, analysts see Ciena's revenue and earnings respectively rising 6% and 17% -- so it clearly has steadier growth than Infinera.

What do the valuations tell us?

Infinera doesn't have a P/E ratio since it wasn't profitable over the past year. Its price-to-sales ratio of 1.7 merely matches the industry average for communication equipment makers.

Ciena trades at 23 times earnings, which is much lower than the industry average P/E of 33. Its forward P/E of 11 is even lower, indicating that it's cheap relative to its growth potential. Ciena's P/S ratio of 1.3 is also below the industry average.

Understanding the headwinds

Both Infinera and Ciena are exposed to rising competition from cheaper players in China, like Huawei and ZTE, and nimbler rivals like Acacia Communications, which provides smaller, denser, and more power-efficient chipsets than many of its competitors.

But amid all that competition, Ciena's gross margins held up better than Infinera's thanks to its better diversified business, which relies less on cyclical boosts:

The clear winner: Ciena

I personally wouldn't buy either stock today since there are more stable income-generating ways to play infrastructure upgrades via telcos or networking equipment companies. But if I had to buy one, it would definitely be Ciena.

Ciena has a better diversified business, decent top and bottom line growth, and lower valuations. That makes it a smarter play than Infinera, which is weighed down by its lack of profitability, sluggish long haul WDM business, and a lack of competitive advantages against its metro and DCI competitors.

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Leo Sun owns shares of Verizon Communications. The Motley Fool owns shares of and recommends Infinera and Verizon Communications. The Motley Fool has a disclosure policy.