Unified DOCSIS 40 And Fiber Expansion Will Yield Global Opportunities

Key Takeaways

• Harmonic is positioned for growth with upgrades to DOCSIS 4.0, Fiber expansions, and virtualized platform innovations enhancing global reach and revenue prospects.
  
• Diversification via new customer acquisitions and strategic financial maneuvers, such as a stock repurchase program, potentially boosts earnings and shareholder value.
  
• Macroeconomic uncertainties, tariff risks, and reliance on key customers may challenge Harmonic's revenue growth and financial stability, particularly affecting Broadband performance.

Catalysts

Provides broadband access solutions worldwide.

• Harmonic is well-positioned to gain from the shift to Unified DOCSIS 4.0 and Fiber expansions, expecting strong revenue growth in 2026, after navigating through the deployment delays in 2025. This will positively impact revenue.
  
• The integration of the cOS platform and the addition of new customers, including substantial clients such as a Tier-1 Latin American operator, is driving customer diversification and global expansion, potentially boosting future earnings.
  
• The innovation in virtualized platforms and Fiber wins is expected to provide long-term growth momentum, as evidenced by record Fiber bookings and rising demand from Rest of World markets, enhancing revenue prospects.
  
• Harmonic's Video segment is poised for sustainable growth with SaaS streaming expansion, supported by robust demand for AI-based monetization tools and hybrid solutions, potentially improving Video revenue and net margins.
  
• The ongoing stock repurchase program of up to $200 million, slated to be funded by strong free cash flows, could drive earnings per share (EPS) growth by reducing the share count and signaling management's confidence in future performance.

Harmonic Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Harmonic's revenue will grow by 1.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.7% today to 13.9% in 3 years time.
• Analysts expect earnings to reach $100.5 million (and earnings per share of $0.59) by about July 2028, up from $53.2 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.0x on those 2028 earnings, down from 19.6x today. This future PE is lower than the current PE for the US Communications industry at 28.4x.
• Analysts expect the number of shares outstanding to decline by 2.78% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.67%, as per the Simply Wall St company report.

Harmonic Future Earnings Per Share Growth

Risks

• The potential tariff exposure and ongoing tariff uncertainties present a risk to Harmonic's Broadband business, as they could disrupt supply chains, impact costs, and lead to shifts in customer orders, potentially affecting revenue and profitability.
  
• Delays in customer deployment plans for Unified DOCSIS 4.0 could result in a below-trend revenue year for Broadband in 2025, impacting short-term revenue growth.
  
• The company’s cautious approach to guidance due to macroeconomic uncertainties, such as tariffs, reflects the potential for market volatility, which could impact financial performance, particularly earnings and margins.
  
• Heavy reliance on a few large customers, like Comcast and Charter, increases risk exposure. Any changes in these customers' spending plans could significantly affect Harmonic’s revenue and cash flow.
  
• While expanding globally, market entry and growth in Rest of World regions might not compensate for any slowdown in the established markets due to potential short-term demand volatility influenced by macroeconomic and geopolitical factors, affecting overall revenue stability.

Valuation

• The analysts have a consensus price target of $10.929 for Harmonic based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $14.0, and the most bearish reporting a price target of just $7.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $722.8 million, earnings will come to $100.5 million, and it would be trading on a PE ratio of 14.0x, assuming you use a discount rate of 7.7%.
• Given the current share price of $9.22, the analyst price target of $10.93 is 15.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.