Optical and photonics part vendor Lumentum Holdings (LITE -0.58%) delivered an impressive efficiency on the inventory market final yr, registering wholesome positive factors of 61% as buyers took word of the rising impression of synthetic intelligence (AI) on the corporate’s enterprise, and it appears to be like just like the inventory’s red-hot run is right here to remain in 2025.
Lumentum launched fiscal 2025 second-quarter outcomes (for the three months ended Dec. 28, 2024) on Feb. 6. The corporate’s development trajectory continued bettering through the quarter because of the strong efficiency of its cloud and networking enterprise. It’s value noting that Lumentum completed fiscal 2024 on a bitter word, because the weak demand for its optical parts within the industrial section and from telecom suppliers led to a pointy decline in its income and earnings.
Nonetheless, fiscal 2025 is popping out to be a a lot better yr for the corporate because the demand for its optical parts deployed in AI servers for high-speed knowledge transmission is rising quickly. Let’s study Lumentum’s newest outcomes and examine why this firm has room for extra upside.
Lumentum’s AI-driven development is simply getting began
Lumentum reported a ten% year-over-year enhance in its fiscal Q2 income to $402 million, pushed primarily by the AI-powered demand for its parts within the cloud and networking enterprise. Extra particularly, the cloud and networking section’s income elevated 18% from the year-ago interval, offsetting the 21% drop within the industrial enterprise.
The cloud and networking enterprise now accounts for 84% of Lumentum’s high line, and the rising affect of this section on Lumentum’s high line ought to pave the best way for stronger development going ahead. This explains why the midpoint of Lumentum’s fiscal Q3 steerage of $417.5 million would translate right into a 14% leap from the year-ago interval.
Lumentum administration factors out that it’s witnessing wholesome demand from hyperscale cloud clients. Extra particularly, the demand from its largest hyperscale buyer elevated through the quarter, and it began quantity shipments to a brand new buyer. Even higher, Lumentum’s parts are within the qualification part at one other buyer. Administration estimates that it’ll start quantity shipments to this new buyer in fiscal This autumn.
The great half is that the demand for Lumentum’s parts utilized in knowledge facilities is so sturdy that the corporate is growing its manufacturing capability. So, it will not be shocking to see Lumentum’s development certainly selecting up because the yr progresses. Analysts are forecasting the corporate to finish the yr with an 18% enhance in income to $1.6 billion, adopted by wholesome development over the following couple of years as properly.
LITE Income Estimates for Subsequent Fiscal Yr knowledge by YCharts
Lumentum administration factors out that its “engagement with cloud clients and AI infrastructure suppliers on their long-term expertise and product roadmap has reached an all-time excessive.” The shipments of its externally modulated lasers (EMLs), which allow high-speed knowledge transmission with the assistance of fiber-optic cables, hit a document final quarter because of AI-related demand.
Wanting forward, Lumentum’s EML shipments are more likely to head increased because it expects to realize extra market share on account of recent design wins for AI functions. What’s extra, the info middle interconnect (DCI) market that Lumentum is focusing on is anticipated to develop by 71% over the following 4 years, in keeping with one estimate, with AI set to play a central function on this market’s wholesome development. So, Lumentum could possibly be firstly of a terrific long-term development alternative.
Robust earnings development may result in spectacular inventory value upside
One other factor value noting is that Lumentum’s margins are getting higher on account of upper manufacturing utilization and its give attention to maintaining prices below examine. Consequently, Lumentum’s non-GAAP (adjusted) working margin jumped by six share factors yr over yr within the earlier quarter. This led to stronger development of 75% within the firm’s backside line final quarter to $0.42 per share.
Consensus estimates are projecting a 73% enhance within the firm’s backside line this yr to $1.75 per share, adopted by excellent development over the following two years as properly.
LITE EPS Estimates for Subsequent Fiscal Yr knowledge by YCharts
Assuming Lumentum may hit $4.74 per share in earnings in fiscal 2027 and trades at 27.6 occasions earnings at the moment (consistent with the tech-laden Nasdaq-100 index’s ahead earnings a number of), its inventory value may hit $131 in simply over two years. That might be a 60% leap from present ranges, suggesting that this AI inventory has the potential to fly increased even after clocking spectacular positive factors final yr.
