Buy the turn. Invest in the optical space when green shoots emerge, just as the turn in fundamentals begins to manifest. Sell into record results. This has always been a successful formula in the highly volatile Optical Market.
Well, the turn is here for Lumentum Holdings Inc (LITE).
LITE's main business has bottomed:
"Our Cloud & Networking segment had a challenging quarter with revenue declining 19% sequentially and 11% year-over-year. While overall demand for telecom products was soft in the quarter, as expected, we are encouraged by several positive trends emerging within this part of our business. We saw an increase in shipments for Narrow Line with Tunable Lasers used in 400ZR modules for Data Center Interconnect applications."
"While there are still lingering industry inventory challenges, we are encouraged by recent indications of improvement in the traditional networking market. Recent weeks have brought increased customer demand to our newest leading-edge coherent transmission and next-generation transport products, along with continued signs of customer inventory normalization."
Concurrently, Lumentum has MULTIPLE WAVES of new product releases targeting AI in the Data Center market. Take a look at the J-Curve in its TAM poised to unfold:
The conference call last night was a party. LITE is accelerating CapEx due to a multi-year cycle poised to unfold in its upcoming Fiscal 2025. The company cannot keep up with demand, with a number of new products sold out and on allocation through the end of calendar 2025:
"Within Data Centers, the shift to 200G lane speeds, particularly in 1.6T optical transceivers, plays to our strength. The growing importance of single-mode optics and indium phosphide lasers, driven by the limitations in multi-mode optics, aligns well with our market and technology leadership positions. Our industry-leading 100G EML transmitter components have established a strong reputation for performance, quality and reliability and are currently shipping in record volumes. Our proven capabilities position us favorably as the industry adopts 200G per lane technologies.
Our 200G EMLs are being qualified by multiple customers for integration into their transceivers and subsequent deployment in a wide range of cloud and AI infrastructures. We anticipate being a key laser supplier in initial 1.6T transceiver deployments as we ramp up 200G EMLs later this fiscal year. In Q4, we achieved record volume shipments of EMLs and secured substantial bookings, which we will be working to fulfill throughout fiscal 2025. This includes initial orders for 200G EMLs from leading AI customers. Based on this momentum, we foresee continued strong EML shipments throughout fiscal 2025 and into fiscal 2026.
Additionally, we are supplying differentiated laser sources for Silicon Photonics-based transceivers, further broadening our content opportunity within the data center market. We have also made significant progress on our newest 800G energy and initial 1.6T transceiver product developments. We are deeply engaged with multiple customers, and we have received favorable feedback after providing product samples to these customers. We have secured a major award with one new customer and are actively working to finalize additional awards with multiple customers.
The second prong of our cloud strategy involves expanding the manufacturing capacity for both optical transceivers and optical components at established Lumentum facilities outside of China. This expansion is critical to supporting our Cloud Customers' growing AI and Cloud workloads while ensuring supply chain security. As mentioned earlier, Indium Phosphide Lasers are essential for scaling data center infrastructure. Due to overwhelming demand for our critical technology, our Indium Phosphide capacity is fully subscribed to at least the end of calendar 2025, and therefore, we can only meet this demand by growing capacity."
It's been a while since I have seen so many superlatives contained in a few paragraphs. Thus all the bolding texting above.
Let's sum it up. The demand for LITE's legacy business has bottomed and is turning up. This will be augmented by a multi-year up-cycle in numerous new products targeting new, very large customers within the Data Center market to help them scale AI.
Revenues and earnings will boomerang the next 3-10 quarters. Exiting CY25, Lumentum will be doing over $500M a quarter in revenues. This should mean $1-$1.50 in EPS a quarter. So, run-rating $5 a share six quarters out.
LITE expects this cycle to last for years:
"We have multiple cloud customer engagements which will drive meaningful revenue growth and drive total company quarterly revenue to exceed $500M exiting calendar 2025. Additionally, we expect that significant growth will continue into 2026 and 2027.
We are working on several significant opportunities today that we expect will propel our Cloud business into a multi-billion dollar annual run rate business in the coming years. Given all of this, it's clear that the future is bright for Lumentum."
We think they peak at $2.5B-$3B three years out, with $8 EPS.
Yep, you heard it here first. This compares quite favorably to current consensus, late Wednesday night. Please take a look:
So, how do we play it? Well, for now, SLOWLY.I am not a big fan of the chart set up coming into this print. The stock just broke down badly from 52-week highs, 33% in less than a month. Odds favor some time needed before it can break out.
We are taking a patient approach here, legging into the stock in the coming sessions. We plan to keep our allocations small.
Above all else, we will be paying close attention to the stock's volume on Thursday.
LITE has literally done nothing in years. If LITE were to trade on pace for a 5-10x Volume Inflection (i.e. 9-17M shares tomorrow) and, should it then be able to close between $58-$60, we will then increase our positioning in the stock.
Note, $60 is a huge level, where the multi-year downtrend will be broken. It will become a different stock when $60 is taken out on a closing basis. $100 seems likely to us in 9-15 months
STOP LOSS: We like the long-term setup in LITE. As such, we will be small for now and use a TIME STOP of 3 months to be there for the next quarter. Should company execution be lacking, we would then exit. But with the turn at hand, not to mention MULTIPLE new product releases simultaneously overlapping, the time to get long is here.
The Opticals are a tough group. Buy them when the turn is about to unfold. That is where we are with LITE. In 4-6 quarters, the backdrop will be looking amazing for the company. That will be the time to sell.
We give LITE a 7-conviction.
While we believe it will become a Top Tier Inflection in the next two quarters, we are remiss to play this in size now due to the thesis still unfolding. But we think there is an 80% likelihood a seminal inflection is forthcoming, thus the Top Tier designation in the name.
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Disclosure: We are long LITE stock. We may change our positioning at a moment’s notice, without notifying you of any such moves.
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