2023-06-07 00:37:54 ET
Summary
- Harmonic Inc. has strong fundamentals and is expected to experience faster-than-average growth over the next three years.
- The company forecasts strong revenue and EBITDA growth through 2025, with a CAGR of 34% for revenue and 61% for adjusted EBITDA.
- Investors should be patient and wait for a dip in the stock price before buying, as the stock is volatile and at a peak.
Between June 2, 2022, and June 2 this year, Harmonic Inc ( HLIT ) delivered a huge return to shareholders: 73.13%.
Harmonic 5-year price chart ( Seeking Alpha )
That was great if you owned shares a year ago, but what about the future? Can Harmonic keep generating solid returns going forward?
With that question in mind, let’s dig into the fundamentals that should give us evidence on which to assess the company.
Founded in 1988, Harmonic has two business segments: broadband and video. Telecom companies are its biggest customers, and according to its 10-K for 2022, the biggest of those are AT&T ( T ), Charter Communications ( CHTR ), and Comcast ( CMCSA ).
The telecoms operate in a highly competitive industry, as do the tech companies that serve them. In its annual filing, Harmonic called its businesses extremely competitive and characterized by rapid technological change and declining selling prices.
Competitors include Viavi Solutions Inc. ( VIAV ), NetScout Systems, Inc. ( NTCT ), Digi International Inc. ( DGII ), Extreme Networks, Inc. ( EXTR ), and Infinera Corporation ( INFN ). All, including Harmonic, have market caps between $1.1 billion and $2.23 billion.
One of the consequences of that competition is that Harmonic must spend heavily on research and development to remain competitive. In 2022, it invested $120.3 million in R&D—that was roughly 19% of its revenue.
The company began financing itself with long-term debt in 2015, and which topped out at $139.59 million in 2020. In 2021 and 2020, it aggressively repaid much of that debt and owed just $11.16 million at the end of 2022.
Or did it just change pockets? In 2021, its short-term debt ballooned from $11.8 million to $41.8 million and in 2022 it increased again to $118.7 million. All of this means its net debt currently sits at $69 million, which is not far off the $68.7 million it held in 2018 (for more information on the firm’s debt, see Note 12 in the 10-K for 2022).
While debt levels have been relatively static, Harmonic’s diluted earnings per share before extraordinary items has grown into profitability:
Harmonic EPS ( Seeking Alpha )
Those earnings have been strong enough to provide a material amount of free cash flow for reinvestment in growth. At the end of the first quarter of 2023, it had levered free cash flow of $38.73 million.
The company does not pay a dividend and has been issuing more, rather than repurchasing its own shares. This means that all its free cash flow is available for reinvestment.
A note of caution: the number of shares outstanding has crept up over the past five years—and may continue to grow in coming years. Each increase dilutes the value of shares, at the expense of investors.
As we saw, earnings per share have accelerated since 2020—and total revenue on a trailing 12-month basis has jumped, too:
Harmonic total revenue ( Seeking Alpha )
Having revenue is fine, but can it be turned into profits, AKA net income? That depends on the margins, and in the end, the net margin. Again, that 2020/2021 period has been pivotal, with the net moving from negative to positive:
Harmonic net margin ( Seeking Alpha )
Thanks to that profitability, Harmonic is a strong performer in the ICT sector (equipment and services related to the electronic display of information in broadcasting, computing and telecom devices).
Here are some of the key metrics:
- Revenue growth (year-over-year): 16.97% versus 11.72% for the sector.
- EBITDA growth (YOY): 110.83% compared to 11.87% for the sector.
- EPS diluted growth (YOY): 75.75% versus 9.61% for the industry.
While I would not expect the same outperformance in coming years, I still expect Harmonic to do well on these key metrics (which, of course, should push up the share price).
In the first quarter of 2023, its broadband revenue grew 23% compared to the same period last year. Video SaaS revenue was up 72%, driven by what CEO Patrick Harshman called “strong demand for our products and services.”
Looking ahead, Harmonic forecasts strong revenue and EBITDA growth through 2025. In its May 2023 Investor Presentation, the firm targets revenue to grow from last year’s $340 million to $825+ million in 2025. It also expects its adjusted EBITDA to grow from $16 million to $232+ million in 2025:
Harmonic guidance (May 2023 Investor Presentation)
If Harmonic can hit these targets, the numbers imply that revenue will experience a compounded annual growth rate of 34%. The CAGR for adjusted EBITDA is even better, at 61%.
These asymmetric growth rates, in which EBITDA grows faster than revenue, indicate that the company is well-managed. It is efficiently and effectively converting its revenue into higher earnings.
Even if Harmonic just keeps up with industry growth, it should enjoy robust gains:
Harmonic addressable market (May 2023 Investor Presentation)
Professional investors are also optimistic, as shown through their actions. According to Nasdaq.com , institutional investors owned 99.61% of shares outstanding at the end of the first quarter.
Normally, I would say that heavy institutional ownership makes it less likely that share prices will fluctuate much, but that’s not the case for Harmonic:
Harmonic 5-year price chart ( Seeking Alpha )
As the chart makes clear, the stock is volatile and heading for, or at, one of its peaks. That makes this a selling opportunity if you already own shares—and want to exit.
For those who plan to buy, patience will be the key. Wait for another dip, and you may be able to get a $2 or $3 discount on the current price of $17.84.
As for valuation by other measures, the P/E ratio is high, at 30.78, which is well above the sector median of 19.30.
Thanks to the rapidly growing EBITDA, the PEG ratio (GAAP and TTM basis) shows modest undervaluation. It stands at 0.81, which is below the fair-value range, which begins at 1.00.
Price/sales ((TTM)) comes in at 3.00, which is close to the sector median of 2.89. Price/book ((TTM)) at 5.92 is significantly higher than the sector median of 3.05.
Summing up, Harmonic Inc. has robust fundamentals that suggest faster-than-average growth over the next three years. Indeed, if it hits its three-year targets, it will be an outstanding growth stock. But, to get the full measure of any potential gains, wait for a dip in the stock price.
For further details see:
Harmonic: Robust Earnings Growth And Capital Gains