Viavi Solutions Inc: Why This 5G Play Could Rise 50% to Start

VIAV stockViavi Solutions Stock Breaks Out to Record High

The adoption of 5G technology will be a major theme over the next few years as the U.S. plays catch-up with market leader China.

Former U.S. President Donald Trump helped slow the speed of 5G development by Chinese companies while helping domestic players—including Viavi Solutions Inc (NASDAQ:VIAV)—accelerate their own 5G development.

Those who were trading stocks back in the late 1990s and early 2000s may be familiar with JDS Uniphase Corporation, a high-flying fiber optic company that subsequently split into Viavi Solutions and Lumentum Holdings Inc (NASDAQ:LITE).

Viavi Solutions Inc offers a broad range of networking solutions to communications companies and other companies worldwide. The superlative demand for 5G networking solutions could power a monstrous rally in VIAV stock.

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A look at the Viavi Solutions stock chart below shows a breakout to a record high. The stock displayed a bullish golden cross pattern prior to making an ascending triangle breakout.

Yet, this could be only the lead-up to bigger moves, as VIAV stock is still only up 11% over the last year.

Chart courtesy of StockCharts.com

Reasonable Valuation Supports Bigger Gains for VIAV Stock

Viavi Solutions Inc’s revenues have more or less managed to move higher over the past five fiscal years (ending in June), surpassing the $1.0-billion threshold in fiscal 2019.

Fiscal Year Revenues Growth
2016 $906.3 Million N/A
2017 $811.4 Million -10.5%
2018 $875.8 Million 2.9%
2019 $1.13 Billion 29.1%
2020 $1.14 Billion 0.5%

(Source: “Viavi Solutions Inc.” MarketWatch, last accessed February 8, 2021.)

There was some hesitancy in fiscal 2020, but the positive growth is expected to continue.

Viavi Solutions is expected to report a slight 3.3% increase in revenues to $1.17 billion in fiscal 2021, followed by 5.9% to $1.24 billion in fiscal 2022. (Source: “Viavi Solutions Inc. (VIAV),” Yahoo! Finance, last accessed February 8, 2021.)

Along with its rise in revenues, Viavi Solutions managed to record positive earnings before interest, taxes, depreciation, and amortization (EBITDA) in five straight years, to a record $197.9 million in fiscal 2020.

Fiscal Year EBITDA (Millions) Growth
2016 $87.6 N/A
2017 $92.9 6.1%
2018 $93.6 0.8%
2019 $189.1 102%
2020 $197.9 4.7%

(Source: MarketWatch, op. cit.)

Viavi Solutions Inc’s profitability picture has been inconsistent. The company made money in three of the last five years, based on generally accepted accounting principles (GAAP) earnings per share (EPS).

Fiscal Year GAAP Diluted EPS Growth
2016 -$0.42 N/A
2017 $0.71 269.1%
2018 -$0.21 -130.1%
2019 $0.02 110.9%
2020 $0.12 424.8%

(Source: MarketWatch, op. cit.)

On an adjusted basis after stripping out one-time items, Viavi Solutions made $0.73 per diluted share in fiscal 2020.

The company’s outlook looks decent, given the COVID-19 pandemic. Analysts estimate that Viavi Solutions will earn $0.79 and $0.85 per diluted share in fiscal 2021 and 2022, respectively. (Source: Yahoo! Finance, op. cit.)

An impressive statistic is that Viavi Solutions produced positive free cash flow in the last five consecutive years, to a record $102.1 million in fiscal 2020. This will give the company the financial flexibility to do things such as reduce its debt.

Fiscal Year Free Cash Flow (Millions) Growth
2016 $17.4 N/A
2017 $55.7 220.1%
2018 $23.5 -57.8%
2019 $93.3 297.0%
2020 $102.1 9.4%

(Source: MarketWatch, op. cit.)

Analyst Take

In my view, the upside potential for Viavi Solutions stock looks great. The stock trades at 19.4 times its consensus fiscal 2022 EPS estimate, and it has a price/earnings to growth (PEG) ratio of 1.31. That’s attractive for a technology growth stock.

A 50% increase in the price of VIAV stock wouldn’t be unreasonable.

But if you aren’t convinced, consider that 394 institutions hold a 98.5% stake in the outstanding shares of Viavi Solutions Inc. Moreover, insiders have added a net 605,834 shares of Viavi Solutions over the last six months. (Source: Yahoo! Finance, op. cit.)