Last Update 08 Dec 25

Fair value Increased 10%

LITE: AI Optical Demand Will Drive Future Multiple But Limit Near-Term Upside

Analysts have lifted their price target on Lumentum Holdings, raising it from roughly $230 to about $255 per share, as they grow more confident that surging AI driven demand for data center optics and optical circuit switches will support faster revenue growth and a higher future earnings multiple, despite modestly lower margin expectations.

Analyst Commentary

Recent Street research points to a broadly constructive outlook on Lumentum, with a notable cluster of target price increases reflecting growing confidence in the durability of AI driven optical demand and the company’s execution on its product roadmap.

Bullish Takeaways

Bullish analysts highlight Lumentum as a leading beneficiary of accelerating AI infrastructure build outs, citing strong demand for optical circuit switches, high speed lasers, and data center transceivers as key drivers of multi year revenue growth.
Several research notes emphasize that capacity expansion and fungible manufacturing for both EML and silicon photonics transceiver designs should support share gains across major cloud customers, underpinning above consensus growth expectations beyond fiscal 2026.
Upside to valuation is framed around the company’s role as a core AI enabler, with price target hikes assuming that increasing TPUs and high bandwidth memory deployments will translate into a sustained uplift in optical connectivity content per rack.
Analysts also point to early achievement of prior financial targets and long term service agreements with high value customers as signs that execution risk is moderating, which justifies higher earnings multiples and more ambitious price objectives.

Bearish Takeaways

Bearish analysts, while lifting their targets, caution that much of the AI upside is already being capitalized into the share price. This may limit near term risk reward if execution or demand timing falls short of current expectations.
Some research commentary notes that intermediate term forecasts are now closer to consensus. This suggests less room for positive surprises and reduces the case for an aggressively bullish rating despite favorable structural trends.
There is also recognition that broader macro and sector specific headwinds, including potential softness in non AI end markets and competitive dynamics in high speed optics, could cap margin expansion and temper valuation re rating.
A few notes flag that peers in adjacent optical markets may offer cleaner near term setups, underscoring that any slip in Lumentum’s ramp cadence or customer mix could prompt investors to rotate into alternative AI optical names.

What's in the News

Lumentum issued new earnings guidance for the second quarter of fiscal 2026, projecting net revenue between $630 million and $670 million, reinforcing expectations for strong AI related demand in data center optics (company guidance).
The company announced multiple live technology demonstrations at the ECOC conference, including ELSFP external laser source modules designed for co packaged optics in hyperscale AI data centers, expected to begin sampling in the first quarter of calendar 2026 (company announcement).
Lumentum is showcasing a 1.6T DR8 TRO OSFP pluggable transceiver, targeting cloud and AI applications with lower power dissipation and leveraging in house manufacturing as it ramps into volume production (company announcement).
The firm began sampling an extended C plus L ultrawideband nano iTLA laser assembly, offering more than 12.4 THz of tunability for AI driven data center interconnects, metro, and long haul networks (company announcement).
Lumentum expanded its Optical Circuit Switch portfolio with the new R64 platform, a 64x64 port MEMS based switch aimed at lower port count AI data center deployments, with customer sampling slated for the fourth quarter of 2025 and general availability in the second half of 2026 (company announcement).

Valuation Changes

Fair Value: increased modestly from approximately $231.33 to about $255.14 per share, reflecting a higher intrinsic value estimate.
Discount Rate: edged down slightly from roughly 8.43 percent to about 8.38 percent, implying a marginally lower perceived risk profile.
Revenue Growth: risen slightly from about 33.86 percent to roughly 34.59 percent, indicating a small uplift in long term top line expectations.
Net Profit Margin: declined marginally from approximately 15.56 percent to about 15.30 percent, signaling slightly more conservative profitability assumptions.
Future P/E: increased meaningfully from around 32.6x to roughly 35.9x, suggesting a higher valuation multiple on expected forward earnings.

Surging demand in cloud, AI, and data centers drives growth, with constrained supply enabling higher margins and profitability.
Manufacturing expansion, innovation, and strong customer adoption position the company for ongoing revenue and earnings gains.
Heavy reliance on a few major cloud customers, production constraints, low cloud module margins, and rising competition heighten revenue, margin, and supply chain risks.

Catalysts

About Lumentum Holdings

Manufactures and sells optical and photonic products in the Americas, the Asia-Pacific, Europe, the Middle East, and Africa.What are the underlying business or industry changes driving this perspective?

Rapid acceleration of demand for advanced optical components due to global AI, cloud computing, and hyperscale data center growth is positioning Lumentum for sustained top-line expansion, as evidenced by 67% year-over-year growth in Cloud & Networking and marked increases in EML and laser shipments-directly supporting revenue growth and operating leverage.
Capacity constraints in high-value product lines (e.g., EMLs, lasers for 1.6T transceivers, and OCS) combined with multi-quarter supply/demand imbalance are currently enabling favorable pricing dynamics and elevated margin potential, which are likely to positively impact both gross margins and overall profitability as new manufacturing investments come online.
Early and accelerating customer adoption of next-generation modules (cloud modules, 200G+ EMLs), optical circuit switches, and co-packaged optics-backed by record orders and a growing hyperscaler customer base-provide clear, additive revenue streams that are projected to materially increase total revenue and expand earnings over the next 12-18 months.
Lumentum's leadership and innovation in energy-efficient, higher-performance photonic solutions are aligning with hyperscalers' and cloud providers' sustainability and scalability imperatives; this enables margin upside through both premium pricing and product differentiation, likely supporting margin expansion as new platforms (OCS, CPO) scale.
Strategic manufacturing investments (such as wafer fab expansions and global production diversification) are set to unlock incremental capacity and ensure supply continuity-addressing both volume growth and geopolitical risks-which should further support both revenue acceleration and long-term improvement in net margins and earnings stability.

Lumentum Holdings Earnings and Revenue Growth

Lumentum Holdings Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

Analysts are assuming Lumentum Holdings's revenue will grow by 23.4% annually over the next 3 years.
Analysts assume that profit margins will increase from 1.6% today to 12.6% in 3 years time.
Analysts expect earnings to reach $389.1 million (and earnings per share of $5.1) by about September 2028, up from $25.9 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $520 million in earnings, and the most bearish expecting $259.2 million.
In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 33.2x on those 2028 earnings, down from 362.0x today. This future PE is greater than the current PE for the US Communications industry at 25.6x.
Analysts expect the number of shares outstanding to grow by 1.75% per year for the next 3 years.
To value all of this in today's terms, we will use a discount rate of 8.55%, as per the Simply Wall St company report.

Lumentum Holdings Future Earnings Per Share Growth

Risks

What could happen that would invalidate this narrative?

Lumentum's rapid cloud and AI growth is highly dependent on the hyperscale customer base (notably just three key customers driving cloud module growth), creating significant revenue concentration risk-any reduction in orders or a shift of demand to competitors or in-house solutions would negatively impact top-line revenue and earnings.
While the company is investing heavily in capacity expansion (wafer fab upgrades, new manufacturing facilities), it currently confronts production constraints and supply-demand imbalance; failure to execute on ramping capacity, or unforeseen delays, could limit its ability to capture incremental revenue and profit growth.
The company explicitly acknowledges that gross margins in cloud modules are subpar (potentially as low as 30%) compared to the corporate average, meaning the long-term mix shift toward lower-margin cloud modules could blunt overall margin expansion and impact long-term net margins.
Strong competition, including from Japanese EML suppliers and rising silicon photonics-based solutions, poses a risk of future technology disruption or commoditization-if differentiated performance wanes or price pressure intensifies, Lumentum could face compressed gross margins and market share loss.
Although management expects minimal impact from current tariffs and regulations, the fluid geopolitical and trade environment-including potential changes to tariff exemptions or foreign manufacturing policies-presents an ongoing, material risk to supply chain continuity, manufacturing costs, and international revenues.

Valuation

How have all the factors above been brought together to estimate a fair value?

The analysts have a consensus price target of $138.263 for Lumentum Holdings based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $165.0, and the most bearish reporting a price target of just $83.0.
In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $3.1 billion, earnings will come to $389.1 million, and it would be trading on a PE ratio of 33.2x, assuming you use a discount rate of 8.6%.
Given the current share price of $134.12, the analyst price target of $138.26 is 3.0% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.

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Disclaimer

AnalystConsensusTarget is a tool utilizing a Large Language Model (LLM) that ingests data on consensus price targets, forecasted revenue and earnings figures, as well as the transcripts of earnings calls to produce qualitative analysis. The narratives produced by AnalystConsensusTarget are general in nature and are based solely on analyst data and publicly-available material published by the respective companies. These scenarios are not indicative of the company's future performance and are exploratory in nature. Simply Wall St has no position in the company(s) mentioned. Simply Wall St may provide the securities issuer or related entities with website advertising services for a fee, on an arm's length basis. These relationships have no impact on the way we conduct our business, the content we host, or how our content is served to users. The price targets and estimates used are consensus data, and do not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that AnalystConsensusTarget's analysis may not factor in the latest price-sensitive company announcements or qualitative material.

Optical Demand Will Strengthen Cloud And AI Expansion Amid Rising Industry Momentum