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

Key Takeaways

• 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

Manufactures and sells optical and photonic products in the Americas, the Asia-Pacific, Europe, the Middle East, and Africa.

• 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 Future Earnings and Revenue Growth

Assumptions

• 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

• 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

• 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.