Data Center Upgrades And Fiber Demand Will Unlock Future Opportunities

Key Takeaways

• Strong demand for advanced optical and fiber solutions, driven by data center and fiber network upgrades, is propelling long-term structural revenue growth.
  
• Diversification into aerospace and defense plus increasing recurring revenue are reducing dependence on volatile markets and stabilizing earnings.
  
• Prolonged weakness in core markets, supply chain and geopolitical risks, and integration challenges from acquisitions heighten revenue volatility, margin pressure, and overall financial risk.

Catalysts

Provides network test, monitoring, and assurance solutions for communications service providers, hyperscalers, network equipment manufacturers, original equipment manufacturers, government, and avionics customers in the Americas, the Asia-Pacific, Europe, the Middle East, and Africa.

• Viavi is experiencing robust and sustained demand across the data center ecosystem, with customers updating optical connectivity to 400G, 800G, and now 1.6T-enabling multi-year upgrade cycles and expanding its total addressable market, which should drive structural revenue growth through 2026 and beyond.
  
• The rapid proliferation of fiber broadband deployments for both hyperscale data interconnect and traditional carrier networks, coupled with aggressive announced spending by North American fiber operators, points to a significant near-term acceleration in fiber-related test equipment orders-supporting higher future revenues.
  
• Viavi's advanced 1.6T test solution puts it technologically ahead of competitors, leading to new customer wins and anchoring follow-on orders throughout the optical and data center value chain-likely sustaining elevated gross margins and margin expansion as volumes scale.
  
• Diversification into high-growth verticals such as aerospace and defense, boosted by successful acquisitions (e.g., Inertial Labs), is shifting the revenue mix away from volatile service provider spend and creating more predictable, recurring revenue streams that should stabilize and incrementally lift earnings.
  
• Increasing demand for end-to-end network instrumentation from the data center sector, now viewed as mission-critical, should reduce historical cyclicality linked to telecom service provider budgets and provide more consistent revenue visibility and smoother earnings trajectory.

Viavi Solutions Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Viavi Solutions's revenue will grow by 5.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.2% today to 17.7% in 3 years time.
• Analysts expect earnings to reach $227.3 million (and earnings per share of $0.49) by about September 2028, up from $34.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.9x on those 2028 earnings, down from 73.8x today. This future PE is lower than the current PE for the US Communications industry at 25.6x.
• Analysts expect the number of shares outstanding to grow by 0.65% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.52%, as per the Simply Wall St company report.

Viavi Solutions Future Earnings Per Share Growth

Risks

• The company faces persistent weakness in its wireless infrastructure test business, with recovery continuing to be delayed due to ongoing business weakness at leading wireless network equipment manufacturers; if this trend persists, it could limit growth in Viavi's wireless segment and negatively impact overall revenue and earnings growth.
  
• Service provider and cable customer segments remain subject to significant cyclicality and delayed spending, with upgrades and large deployments being pushed out due to operator financial dynamics-this ongoing unpredictability in core markets could curtail steady revenue recovery and create volatility in earnings.
  
• Viavi's data center ecosystem segment is growing rapidly, but the company acknowledges that a substantial portion of manufacturing and supply chain flows through regions like China, Thailand, and Vietnam, all of which remain exposed to geopolitical risks, tariffs, or supply chain disruptions-potential regulatory, trade or sourcing shocks could raise costs and impair profit margins.
  
• In OSP, while the core anti-counterfeiting and 3D sensing segments are stabilizing, growth is constrained by high penetration and lack of volume growth at key customers, meaning topline expansion may be limited until new products or markets are realized, risking longer-term stagnation of revenues.
  
• The current business expansion strategy is reliant on successful integration of recent and pending acquisitions (e.g., Inertial Labs and Spirent assets) and supported by new debt financing ($600M Term Loan B); if integration is unsuccessful, if synergies fail to materialize, or if gross/net leverage targets are missed, it could pressure margins and net earnings, leading to increased financial risk.

Valuation

• The analysts have a consensus price target of $14.0 for Viavi Solutions 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 $16.0, and the most bearish reporting a price target of just $12.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.3 billion, earnings will come to $227.3 million, and it would be trading on a PE ratio of 17.9x, assuming you use a discount rate of 8.5%.
• Given the current share price of $11.5, the analyst price target of $14.0 is 17.9% 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.