Viavi stock downgraded—OSP reliance raises concerns, says Morgan Stanley

On Tuesday, Morgan Stanley (NYSE:MS) adjusted its stance on Viavi Solutions (NASDAQ:VIAV), downgrading the stock from Equalweight to Underweight. The firm also adjusted the price target to $9.50 from the previous $8.00.

The revision follows an analysis of the company's performance and market conditions. Currently trading at $11.16, VIAV has shown remarkable momentum with a 49.2% surge over the past six months, according to InvestingPro data.

The downgrade by Morgan Stanley reflects concerns about Viavi Solutions' earnings potential, particularly in its Optical Security and Performance (OSP) business. According to the firm, while there has been a recent uptick in the company's stock, the growth prospects in the OSP segment appear limited. This limitation is expected to constrain the upside potential for the company's earnings per share (EPS).

InvestingPro data shows the company operates with a moderate debt level and maintains strong liquidity, with a current ratio of 3.71x. However, based on InvestingPro's Fair Value analysis, the stock appears overvalued at current levels.

Morgan Stanley's assessment indicates that the profitability of Viavi Solutions has been increasingly reliant on the OSP segment. Given the muted growth in this area, the firm suggests that the potential for significant EPS improvement is restricted. While the company wasn't profitable over the last twelve months, InvestingPro analysis reveals that net income is expected to grow this year, with analysts forecasting a return to profitability. Discover 11 more exclusive InvestingPro Tips and comprehensive analysis in the Pro Research Report.

The analyst's commentary highlighted the recent context in which Viavi Solutions has been operating, noting the company's emergence from a period of inventory digestion and subdued service provider spending. Despite understanding the recent movements in Viavi's stock, the firm sees the EPS upside as more contained than before.

In the broader scope of their coverage, Morgan Stanley sees more attractive investment opportunities with better risk-reward profiles. This comparative perspective has contributed to the decision to downgrade Viavi Solutions to Underweight. The new price target of $9.50 represents an increase from the previous target but accompanies a less optimistic outlook on the stock's rating.

In other recent news, Viavi Solutions has made significant strides in its business operations. The company has entered into a definitive agreement to acquire Inertial Labs, a deal valued at $325 million. This acquisition is expected to contribute approximately $50 million to Viavi's Network and Service Enablement revenue in 2025.

Stifel, a financial services firm, has increased its price target for Viavi to $12.00, maintaining a Buy rating on the stock. Analysts from UBS and Rosenblatt have given Viavi a neutral rating, with Rosenblatt increasing the price target to $10.50.

Viavi has also reported a net revenue of $252 million for the fourth quarter of 2024 and announced a restructuring plan aiming for annualized cost savings of approximately $25 million by the end of fiscal 2025. The company has entered an agreement with Telefónica Hispanoamérica to supply automated network inventory management tools and launched a new Ethernet testing module, the ONE-1600, to support the emerging 1.6Tb/s ecosystem.

During the annual meeting, shareholders approved the board and executive pay, ratifying the appointment of PricewaterhouseCoopers LLP as the company's independent registered public accounting firm for the fiscal year 2025. These are the recent developments that have been shaping Viavi Solutions' outlook and operations.

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