Hook & thesis
Viavi Solutions no longer reads like a simple telecom-cycle recovery. Recent results and guidance show the company leaning into AI-driven data-center testing, defense/aerospace demand and higher-margin optical products. That shift is reflected in the stock: up roughly 106% over the past year and trading near its 52-week highs. But the fundamentals - $369 million in revenue for fiscal Q2 and $51.5 million in non-GAAP net income - suggest this isn't just multiple expansion on hopes. It's earnings expansion on expanding end-market demand.
This is an actionable long trade: enter at $26.32, place a stop at $22.00, and target $37.00 over a long-term horizon (180 trading days). The trade backs the view that Viavi's growth is structural rather than cyclical and that market sentiment can sustain higher valuation if revenue and free-cash-flow momentum continues.
Why the market should care - business and fundamental drivers
Viavi sells network test, monitoring and assurance solutions and a separate optical/security business that serves anti-counterfeiting, 3D sensing, aerospace and automotive. Historically the stock reacted to telecom capex cycles. Today the demand picture is broader:
- AI and data-center builders need more rigorous test and validation tools. Viavi reported strong demand from data-center customers during its latest quarter.
- Defense and aerospace customers are a growing, higher-margin end market for Viavi's optical and GNSS/OTA test products.
- Optical coatings and volume manufacturing capabilities create differentiated product lines that are less tied to telco upgrade cycles.
These drivers matter because they expand the company's addressable market and provide more predictable multi-year contracts versus the lumpier telecom upgrade cycle. Supporting market research cited in recent announcements points to accelerating growth in network monitoring and exposure management markets, which favors vendors with scale and test capability.
Numbers that support the story
- Fiscal Q2 revenue: $369 million, up 36% year-over-year.
- Fiscal Q2 non-GAAP net income: $51.5 million, or $0.22 per share.
- Guidance for the next quarter: revenue $386-400 million and adjusted net income $0.22-0.24 per share, which materially beat street expectations when announced (01/30/2026).
- Market capitalization: approximately $6.09 billion.
- Free cash flow: $78.7 million (most recent measure).
- Valuation metrics: price-to-sales ~4.9 and enterprise value roughly $6.60 billion.
- Balance-sheet indicators: debt-to-equity ~1.53 and current ratio ~2.6, giving modest leverage but reasonable short-term liquidity.
Put simply, revenue and earnings growth are now visible and cash generation is positive. The company still carries leverage, but free-cash-flow and improving profitability mean management can invest in product development and targeted M&A without immediately diluting shareholders.
Valuation framing
At a market cap near $6.09 billion and price-to-sales of 4.9, Viavi trades at a premium to legacy telecom-test peers but not atypical for software/hardware hybrid companies that show double-digit top-line growth. The stock is priced for significant execution - continued high-teens to 30% organic growth and margin expansion. P/E is negative on a GAAP basis (EPS around -$0.18), but adjusted profitability ($0.22 in Q2) shows the company can generate meaningful non-GAAP earnings.
Because peer multiples are not provided here, frame valuation qualitatively: the market is assigning value consistent with rapid secular growth (data-center, defense, optical) and improving free-cash-flow. If that growth disappoints, the multiple is vulnerable. Conversely, if guidance holds and FCF ramps beyond $78.7 million, the current valuation could be justified or expanded.
Catalysts to push the stock higher
- Delivery against guidance for the next quarter: management guided revenue to $386-400 million and adjusted EPS $0.22-0.24 on 01/30/2026. Hitting the top half of guidance would reinforce the growth narrative.
- Continued AI/data-center wins: larger orders from hyperscalers to validate an ongoing structural shift in demand for test and assurance tools.
- Defense/aerospace contract growth and volume optical wins that lift margins - these are steadier revenue streams and often multi-year.
- Strategic partnerships that accelerate product commercialization - an example: the OTA testing collaboration announced in 06/27/2024 to speed O-RU testing was explicitly positioned to accelerate adoption.
Trade plan
| Entry | Stop loss | Target | Horizon |
|---|---|---|---|
| $26.32 | $22.00 | $37.00 | Long term (180 trading days) |
Rationale: Enter at the current price of $26.32 to participate in momentum and upcoming quarterly execution windows. The stop at $22.00 limits downside to roughly 16% from entry, protecting capital if the re-rating unwinds. The $37.00 target assumes continued execution and modest multiple expansion as revenue growth and free cash flow solidify the thesis. Expect the trade to last up to 180 trading days because meaningful contract wins, product certifications and quarterly results that re-rate the business typically play out over several quarters.
Risks and counterarguments
Below are the key risks that could invalidate the long thesis, followed by a short counterargument acknowledging the other side.
- Valuation complacency - Price-to-sales around 4.9 implies robust growth baked into the stock. If revenue growth cools or margins compress, valuation could derate sharply.
- Leverage - Debt-to-equity ~1.53 is meaningful. A macro slowdown or slower receivables could strain flexibility and increase interest burden.
- Insider selling - The CEO sold shares worth $1.9 million on 02/06/2026. While management still holds a large position, insider sales can spook sentiment and amplify downside in a sell-off.
- Cyclical risks persist - Parts of Viavi's business still depend on telco and enterprise equipment cycles. A telecom capex pullback would hurt demand for network test products.
- Execution risk - Moving into adjacent markets (AI/data-center, defense) requires scaled sales motions and certification cycles. Missed milestones would compress the multiple quickly.
- Market technicals - Momentum indicators are extended: RSI ~69 and the stock is near its 52-week high of $28.15 (hit 02/12/2026). Short-term bearish MACD momentum and previous spikes in short-volume create the potential for quick pullbacks.
Counterargument
On the flip side, the Q2 beat (01/30/2026) and stronger-than-expected guidance suggest the market is already rewarding demonstrable topline acceleration and margin improvement. Free cash flow of $78.7 million and visible non-GAAP earnings of $0.22 per share give the company credibility beyond optimism. If management continues to convert revenue into cash and expands margins, the current multiple could be conservative rather than stretched.
What would change my mind
I would abandon the long if any of the following occur:
- Management guides materially below current revenue or EPS ranges in the next quarter, or withdraws guidance.
- Free cash flow turns negative or falls materially below the recently reported $78.7 million run rate.
- Debt metrics deteriorate - for example, leverage rising without offsetting margin improvement or credible strategy to deleverage.
- A large customer pullback (hyperscaler or key defense contractor) that meaningfully reduces near-term backlog.
Conclusion and stance
Viavi represents a tactical long that trades the shift from a telecom-capex story to a broader, higher-value set of end markets: AI/data-center testing, defense/aerospace and differentiated optical products. The stock is priced for strong execution; it is not a value play. Enter at $26.32 with a $22.00 stop and a $37.00 target over a 180 trading-day horizon. This plan balances upside from continued execution with disciplined downside protection in a richly valued name.
Execution will be the arbiter. If Viavi sustains its revenue growth trajectory, converts to higher cash flow and nibbles away at larger data-center and defense contracts, the re-rating can continue. If not, the current multiple will become a fast headwind.