What a fantastic six months it’s been for Viavi Solutions. Shares of the company have skyrocketed 227%, setting a new 52-week high of $41.45. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is there a buying opportunity in Viavi Solutions, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Is Viavi Solutions Not Exciting?
Despite the momentum, we're sitting this one out for now. Here are three reasons you should be careful with VIAV and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Unfortunately, Viavi Solutions’s 2.3% annualized revenue growth over the last five years was sluggish. This fell short of our benchmarks.
2. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Sadly for Viavi Solutions, its EPS declined by 3.1% annually over the last five years while its revenue grew by 2.3%. This tells us the company became less profitable on a per-share basis as it expanded.
3. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Viavi Solutions’s ROIC has unfortunately decreased significantly. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
Viavi Solutions’s business quality ultimately falls short of our standards. After the recent rally, the stock trades at 40.3× forward P/E (or $41.45 per share). At this valuation, there’s a lot of good news priced in - we think there are better opportunities elsewhere. We’d recommend looking at the most dominant software business in the world.
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