Loop Capital: Cable, Video Segments Are 2 Reasons To Like Harmonic

The bullish case for video delivery tech company Harmonic Inc (NASDAQ: HLIT) is based on expectations for growth in its two business segments, according to Loop Capital Markets.

The Analyst

Analyst James Kisner initiated coverage of Harmonic with a Buy rating and $8.25 price target.

The Thesis

Harmonic's video segment accounts for around 80 percent of total sales and helps companies manipulate and deliver video content to subscribers, Kisner said in the initiation note. (See his track record here.) 

The industry has moved away from using application-specific integrated circuits and pivoted to software-based solutions that leverage commodity servers, the analyst said. To address the shift in video delivery, Harmonics started introducing software-based solutions, including a SaaS business model, he said. 

While the transition has resulted in declines in the video segment, as revenue from SaaS bookings is recognized over a longer time period vs. traditional hardware-based products, Kisner said. Yet the segment is poised to recover, as higher sales of video products to OTT providers will contribute to a base of recurring SaaS revenue, he said. 

Harmonic's smaller cable edge business segment helps cable operators deliver high-speed internet services in addition to video content, the analyst said. Harmonics was successful in developing a software-based platform that leverages commodity x86 servers instead of purpose-built network equipment, which better addresses the need for service providers to adopt virtual solutions, he said. 

Encouragingly, the largest cable operator in the world, Comcast Corporation (NASDAQ: CMCSA), is a major Harmonics client, and the company also said it reached a new, multiyear supply agreement worth over $50 million with an unnamed Tier 1 international cable operator.

Loop's $8.25 price target is based on a 20 times multiple on estimated 2020 EPS, which is an appropriate valuation given the company's strong earnings growth prospects, Kisner said.

Price Action

Shares of Harmonic were trading higher by nearly 6 percent early Friday morning.

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