VIAVI's AI Pivot Confirms Growth but Amplifies Valuation and Leverage Concerns

What happened

VIAVI Solutions has transitioned from a telecom cycle-dependent business to a growth story centered on AI/data-center infrastructure and aerospace/defense, as highlighted in recent market coverage. This shift is driven by acquisitions like Spirent's high-speed Ethernet assets and Inertial Labs, fueling strong revenue growth with Q1 FY26 up 25.6% year-over-year. However, the move has increased leverage significantly, with net debt/EBITDA at 2.05 and interest coverage of 2.87, while valuation has soared to a P/E of 304x and EV/EBITDA of 37.5x. The market now views VIAVI as a premier AI beneficiary, but this crowded narrative overlooks underlying risks like customer concentration and pricing pressure from competitors. Despite the growth trajectory, weakened financial resilience leaves the company exposed to potential AI capex downturns or integration missteps.

Implication

The transition to AI and data-center markets has boosted VIAVI's near-term prospects, but at current prices, the risk/reward is unfavorable. High leverage from recent acquisitions reduces financial flexibility, making the company vulnerable to earnings misses or macroeconomic shifts. Valuation multiples imply perfection in execution, with little margin for error if Spirent integration underperforms or AI spending slows. Insider selling and crowded market sentiment further suggest caution, as any disappointment could trigger significant multiple compression. Therefore, existing holders should consider profit-taking, while new investors should seek cheaper AI infrastructure exposures.

Thesis delta

The confirmation that VIAVI is no longer a telecom cycle story reinforces the bearish thesis rather than altering it. This shift exposes the company to new cyclical risks in AI capex while maintaining high valuation and leverage, making the stock more susceptible to downside if growth expectations are not met.