Ciena Corp. (NYSE: CIEN), a leading provider of optical networking equipment, was downgraded by Morgan Stanley on Tuesday to Underweight from Equal-weight, as analysts flagged persistent margin compression and limited near-term earnings upside.

The investment bank, which also cut its price target on the Hanover, Md.-based company to $70 from $73, said Ciena’s growing focus on lower-margin pluggable optical modules is weighing on its profitability—even as revenue forecasts climb.

“Revenue estimates for fiscal 2026 are currently 5% higher than they were in March 2024, while EPS estimates are 9% lower,” Morgan Stanley analysts Meta Marshall and Mary Lenox wrote in a note to clients. “Gross margins have lagged expectations, primarily due to growth in the pluggables business. While we see potential for some margin recovery as 800ZR and RLS line cards are adopted, we believe the incremental revenue is unlikely to carry the same margin profile.”

Ciena shares slipped about 1% in midday trading Tuesday.

The margin concern comes as the company pivots into the growing market for high-speed optical interconnects—particularly pluggables used in data centers and metro networks. While the technology positions Ciena in high-demand areas of cloud infrastructure and AI workloads, analysts say the shift may be dilutive to earnings in the short term.

Ciena, led by CEO Gary Smith, has been considered a bellwether in the optical networking space, supplying equipment to major telecoms and hyperscalers. But its evolving product mix is under increased scrutiny as investors reassess growth relative to profitability.

In contrast, Morgan Stanley raised its price targets on three networking peers, reflecting broader optimism around optical infrastructure:

• Corning Inc. (NYSE: GLW): target raised to $50 from $44
• Coherent Corp. (NYSE: COHR): target increased to $92 from $83
• Lumentum Holdings (NASDAQ: LITE): target moved to $85 from $76

The firm maintained Equal-weight ratings on all three.

“Inside or outside the data center, increasing data speed needs necessitate more fiber and optical transmission,” said Marshall. “Still, the datacom segment tends to be lower-margin across the board, so topline growth may not fully translate into EPS upside.”

Marshall added that margin pressure has been most pronounced at Ciena, given its deeper exposure to pluggables. In contrast, Coherent and Lumentum may benefit from improved operational efficiency and yield improvements in the near term.

For Ciena, the downgrade highlights the challenge of striking a balance between strategic positioning in next-generation networks and maintaining profitability—a tension that is likely to persist as competition intensifies in the high-speed connectivity arms race.

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