Should You Add VIAV Stock to Your Portfolio Ahead of Q4 Earnings?

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Earnings Surprise History

Viavi delivered a four-quarter earnings surprise of 13.00%, on average, beating estimates on all occasions. In the last reported quarter, the company’s earnings surprise was 12.5%.

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Earnings Whispers

Our proven model does not conclusively predict an earnings beat for VIAV for the fourth quarter. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the chances of an earnings beat. This is not the case here.

Viavi currently has an ESP of 0.00% and a Zacks Rank #3.

You can see the complete list of today’s Zacks #1 Rank stocks here.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Factors Shaping the Quarterly Performance

During the quarter, Viavi introduced the industry’s first Ultra Ethernet Transport (UET) validation platform, designed to help hyperscalers, cloud providers, neocloud operators, and network equipment manufacturers accelerate the deployment of next-generation AI networks. The launch of the new testing solution will boost Viavi’s prospects in the rapidly growing AI infrastructure space.

The company also introduced the TETRA Mobile Station radio Base Station Simulator for its CX300 communications service monitor. The new upgrades introduced by Viavi enable the CX300 platforms to assess the TETRA radios by replicating real-world scenarios with precision. The upgrades accelerate the testing process, accelerate the deployment timeline and reduce workload for field technicians.

In the quarter under review, Viavi launched the CyberFlood CF1000 Appliance, a native 400G security and application performance testing platform for multi-terabit security and AI data center infrastructures. Built for network equipment manufacturers, hyperscale data center operators and service providers, the platform strengthens Viavi's cybersecurity testing and AI infrastructure validation capabilities. This will broaden the company’s footprint in fast-growing data center markets. Such innovative product launches are expected to have a favorable impact on quarterly results.

However, despite strong focus on innovation, there are some factors that could hinder Viavi’s results to some extent. Traditional telecom service providers remain cautious with capital expenditures. Demand softness in carrier investments could impact the company’s legacy network testing businesses and offset strength from AI-related demand. Higher operating expenses related to R&D and product launches may bring long-term benefits but can impact margin in the near term.

Price Performance

Over the past year, Viavi has surged 216.9% compared to the industry’s growth of 158.5%, outperforming its peers like Keysight Technologies, Inc. KEYS, but underperforming Ciena Corporation CIEN. Keysight has increased 77.1%, while Ciena has improved 255.4% during this period.

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Key Valuation Metric

From a valuation standpoint, Viavi appears to be trading relatively cheaper than the industry and below its mean. Going by the price/earnings ratio, the company shares currently trade at 25.93 forward earnings, lower than 31.33 for the industry and the stock’s mean of 39.19.

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Investment Consideration

Demand from hyperscalers, AI chipmakers, optical module suppliers and networking OEMs is expected to remain the primary growth driver. Particularly, growing investment in AI clusters is driving demand for VIAVI's lab, production and field-testing solutions.

The integration of Spirent's high-speed Ethernet, network security and channel emulation businesses is expected to be a revenue driver. The acquisition has brought a larger enterprise customer base, a stronger Ethernet testing portfolio, cross-selling opportunities and greater exposure to the AI networking domain. In addition to this, the introduction of the industry's first UET validation platform has significantly expanded Viavi’s addressable market beyond traditional telecom testing and into the expanding AI networking domain. Viavi is also boosting its prospects in the aerospace and defense domain with the launch of innovative products like the µPNT GDO-1000 GNSS-disciplined oscillator. Management expects recovery in demand for 3D sensing, anticounterfeiting solutions and industrial optical products during the June quarter. 

However, as AI networking infrastructure expands, competition among testing solution providers is intensifying. Keysight continues to invest in next-generation electronic test equipment. Ciena continues to benefit from growing demand for high-speed optical networking equipment that supports AI data center deployments. Against this backdrop, Viavi is leveraging its capabilities in network validation, optical testing and resilient positioning, navigation and timing (PNT) technologies to boost its competitive edge. 

It is to be noted that Viavi’s growth in recent quarters is fueled by hyperscaler and AI data center spending. Any delay in AI infrastructure deployments or moderation in customer spending could reduce demand for its testing and validation solutions. Persistent economic uncertainty, longer customer purchasing cycles or component supply constraints could delay shipments and impact revenue. Operating cash flow turned negative in the last quarter. Free cash flow was also negative. Increased leverage following acquisitions and financing activities, combined with reduced share repurchases, reflects ongoing balance sheet management challenges.

End Note

AI infrastructure expansion and the Spirent acquisition are expected to be the revenue drivers in the June quarter. Launch of new AI networking products, high-speed interconnect testing opportunities, and growing prospects in the aerospace and defense market are positive factors. However, weak telecom carrier spending, the company’s high reliance on AI infrastructure investment for growth, and macroeconomic and supply chain uncertainties remain major headwinds. Negative free cash flow and increasing leverage are concerning. With a Zacks Rank #3 (Hold), Viavi appears to be treading in the middle of the road, and new investors could be better off if they trade with caution.

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This article originally published on Zacks Investment Research (zacks.com).

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