Giuliano Benzin
Funding Thesis
Harmonic (NASDAQ:HLIT) has skilled a significant inventory value decline following disappointing Q2 outcomes and steering cuts. This momentary setback doesn’t diminish the long-term progress story and upside potential in my opinion. Harmonic stays a pacesetter in video streaming and cable broadband options, with sturdy execution driving SaaS progress and new buyer wins. Regardless of macro issues, Harmonic’s product management and affordable valuation make it a compelling alternative.
My bullish thesis is underpinned by Harmonic’s superior product providing, massive market alternative, progress reacceleration drivers, and engaging valuation after the pullback. I see Harmonic as well-positioned to capitalize on the streaming and broadband tendencies which can be nonetheless in early innings.
Superior Product Providing
Harmonic boasts differentiated know-how and options for video streaming and broadband entry. In video, the VOS360 SaaS platform empowers broadcast-quality streaming companies with cloud origination, focused promoting, and extra. As the worldwide shift to streaming TV accelerates, Harmonic seems poised to considerably profit from this secular tailwind.
As CEO Patrick Harshman acknowledged on the This fall 2022 earnings name, “Our streaming SaaS progress was once more pushed principally by bigger media accounts increasing their client footprints.” Harmonic’s video experience is clearly resonating primarily based on rising consumption of its streaming companies.
In broadband, the CableOS software program resolution permits multi-gigabit web speeds by way of cloud, virtualization and distributed entry architectures. Harmonic’s pioneering work has given it pole place because the trade continues adopting these new community approaches.
Harmonic is focusing on a large market alternative spanning video streaming, broadcast media, and broadband entry. This complete addressable market is increasing globally, fueled by virtualization, focused adverts, fiber buildouts, and the shift to streaming TV. With its confirmed options and cutting-edge applied sciences, Harmonic seems able to capturing vital share on this high-growth market.
Progress Reacceleration Drivers
Latest {hardware} delays that prompted steering cuts don’t impair the long-term outlook. Harmonic’s sturdy order ebook of $650M+ gives clear visibility into continued progress.
New wins like Constitution Communications have began income ramps. Whereas preliminary contributions could also be modest this 12 months, the actual inflection probably is available in 2024+ as large-scale deployments acquire steam globally.
Harmonic’s pioneering work in virtualization gives a multi-year know-how lead as opponents lag behind. This lead is being maintained by way of improvements in areas like DOCSIS 4.0.
Per CEO Patrick Harshman on the This fall 2022 name, “We’re assured about each our 2023 and multiyear progress prospects. Our international pipeline of recent account relationships is great.” The momentary setback doesn’t change the very constructive long-term tendencies.
Valuation
The current pullback leaves Harmonic buying and selling at roughly 1.7x 2023 gross sales, which is means too low for a powerful progress enterprise. The present valuation implies unwarranted pessimism in my opinion, leaving vital upside as sturdy execution and potential upside surprises result in a number of growth. Assuming 20% Income CAGR and a a number of growth to 3x gross sales, my 2028 estimates for Harmonic are the next:
| Income | $1593mm |
| Worth/Gross sales Ratio | 3x |
| Valuation Estimate | $4,780mm |
| Annualized Return | ~35% |
For long-term traders, Harmonic gives an opportunity to purchase a high-quality grower at a considerable low cost. As macro clouds clear and execution persists, materials upside potential stays from in the present day’s entry level.
Dangers
There are dangers to think about, together with extended {hardware} deployment delays, lack of key prospects, unexpected competitors, money burn and dilution, and execution challenges amid fast progress.
Nonetheless, I don’t imagine these short-term dangers outweigh the potential reward contemplating Harmonic’s affordable valuation and huge progress alternative.
The Backside Line
Regardless of momentary setbacks, Harmonic’s long-term prospects look sturdy in my opinion. The corporate is efficiently transitioning to SaaS whereas leveraging its clear product management in video streaming and broadband entry. Main new buyer wins present reacceleration gas. The bearish sentiment seems overdone, and with a reduced entry level HLIT gives compelling upside over the following 3-5 years for affected person traders in my view.