HLIT - Harmonic: Temporary Setback In An Exciting Growth Story

2023-10-11 08:30:40 ET

Summary

• Harmonic has experienced a stock price decline due to short term guidance cuts, but the long-term growth story and upside potential remain strong.
• Harmonic is a leader in video streaming and cable broadband solutions, with strong execution driving SaaS growth and new customer wins.
• The company's superior product offering, large market opportunity, growth reacceleration drivers, and attractive valuation make it a compelling investment opportunity.

Investment Thesis

Harmonic (HLIT) has experienced a major stock price decline following disappointing Q2 results and guidance cuts. This temporary setback does not diminish the long-term growth story and upside potential in my view. Harmonic remains a leader in video streaming and cable broadband solutions, with strong execution driving SaaS growth and new customer wins. Despite macro concerns, Harmonic's product leadership and reasonable valuation make it a compelling opportunity.

My bullish thesis is underpinned by Harmonic's superior product offering, large market opportunity, growth reacceleration drivers, and attractive valuation after the pullback. I see Harmonic as well-positioned to capitalize on the streaming and broadband trends that are still in early innings.

Superior Product Offering

Harmonic boasts differentiated technology and solutions for video streaming and broadband access. In video, the VOS360 SaaS platform empowers broadcast-quality streaming services with cloud origination, targeted advertising, and more. As the global shift to streaming TV accelerates, Harmonic looks poised to significantly benefit from this secular tailwind.

As CEO Patrick Harshman stated on the Q4 2022 earnings call , "Our streaming SaaS growth was again driven principally by larger media accounts expanding their consumer footprints." Harmonic's video expertise is clearly resonating based on growing consumption of its streaming services.

In broadband, the CableOS software solution enables multi-gigabit internet speeds via cloud, virtualization and distributed access architectures. Harmonic's pioneering work has given it pole position as the industry continues adopting these new network approaches.

Harmonic is targeting a massive market opportunity spanning video streaming, broadcast media, and broadband access. This total addressable market is expanding globally, fueled by virtualization, targeted ads, fiber buildouts, and the shift to streaming TV. With its proven solutions and cutting-edge technologies, Harmonic looks capable of capturing significant share in this high-growth market.

Growth Reacceleration Drivers

Recent hardware delays that prompted guidance cuts do not impair the long-term outlook. Harmonic's strong order book of $650M+ offers clear visibility into continued growth.

New wins like Charter Communications have started revenue ramps. While initial contributions may be modest this year, the real inflection likely comes in 2024+ as large-scale deployments gain steam globally.

Harmonic's pioneering work in virtualization provides a multi-year technology lead as competitors lag behind. This lead is being maintained through innovations in areas like DOCSIS 4.0.

Per CEO Patrick Harshman on the Q4 2022 call, "We are confident about both our 2023 and multiyear growth prospects. Our global pipeline of new account relationships is excellent." The temporary setback does not change the very positive long-term trends.

Valuation

The recent pullback leaves Harmonic trading at approximately 1.7x 2023 sales, which is way too low for a strong growth business. The current valuation implies unwarranted pessimism in my view, leaving significant upside as strong execution and potential upside surprises lead to multiple expansion. Assuming 20% Revenue CAGR and a multiple expansion to 3x sales, my 2028 estimates for Harmonic are the following:

For long-term investors, Harmonic offers a chance to buy a high-quality grower at a substantial discount. As macro clouds clear and execution persists, material upside potential remains from today's entry point.

Risks

There are risks to consider, including prolonged hardware deployment delays, loss of key customers, unforeseen competition, cash burn and dilution, and execution challenges amid rapid growth.

However, I do not believe these short-term risks outweigh the potential reward considering Harmonic's reasonable valuation and vast growth opportunity.

The Bottom Line

Despite temporary setbacks, Harmonic's long-term prospects look strong in my view. The company is successfully transitioning to SaaS while leveraging its clear product leadership in video streaming and broadband access. Major new customer wins provide reacceleration fuel. The bearish sentiment appears overdone, and with a discounted entry point HLIT offers compelling upside over the next 3-5 years for patient investors in my opinion.

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