Cloud And AI Markets Will Power Future Manufacturing Capacity

Key Takeaways

• Expansion in laser transmitter chips and optical circuit switch production is expected to boost revenue growth through increased capacity in cloud and AI markets.
  
• Manufacturing upgrades and capacity expansion in indium phosphide wafer production aim to optimize costs and improve margins amidst rising demand.
  
• Leadership changes, supply chain issues, and manufacturing challenges could pressure revenue growth and profitability, impacting investor confidence and strategic flexibility at Lumentum.

Catalysts

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

• Lumentum is expanding its cloud and AI markets customer base and increasing its capacity for laser transmitter chips and optical circuit switch and transceiver production, which is expected to enhance future revenue growth as they meet rising demand.
  
• The company anticipates continued strong demand for its components and subsystems for data center interconnect (DCI), leveraging core technologies for telecom networks, which should positively impact future revenue and gross margins.
  
• Lumentum's ongoing capacity expansion in indium phosphide wafer production aims to support the significant demand for EML chips, expected to exceed supply into 2026, potentially driving future revenue growth and improved gross margins.
  
• The progression of new customer programs, including the ramping of new cloud and networking customer engagements, is anticipated to drive sequential revenue growth and expand gross margins through improved manufacturing utilization.
  
• Lumentum's strategy to upgrade its manufacturing facilities and expand in non-Chinese locations should optimize cost structure and improve operating margins over time as production scales with increased demand.

Lumentum Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Lumentum Holdings's revenue will grow by 23.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from -37.0% today to 5.7% in 3 years time.
• Analysts expect earnings to reach $152.3 million (and earnings per share of $1.4) by about April 2028, up from $-522.8 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $181 million in earnings, and the most bearish expecting $120.3 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 53.1x on those 2028 earnings, up from -7.9x today. This future PE is greater than the current PE for the US Communications industry at 24.6x.
• Analysts expect the number of shares outstanding to grow by 2.37% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.3%, as per the Simply Wall St company report.

Lumentum Holdings Future Earnings Per Share Growth

Risks

• The recent leadership transition at Lumentum, with Alan Lowe retiring and Michael Hurlston stepping in, introduces uncertainty, which could impact investor confidence and potentially affect future strategic decision-making necessary for revenue growth.
  
• The company is experiencing supply chain shortages, particularly in the telecom segment, which may limit its ability to meet demand and thus affect revenue growth in the near future.
  
• The increased focus on expanding manufacturing capacity represents significant capital expenditure, which may pressure Lumentum’s net margins and cash flow if the expected demand does not materialize as anticipated.
  
• The Industrial Tech segment is facing a challenging macroeconomic environment, leading to a sequential decline in revenue, which may weigh on overall company revenue and profitability.
  
• Lumentum’s gross margin is currently under pressure due to initial ramp-up yield issues in the transceiver business and underutilization in the expanded production infrastructure, potentially impacting profitability in the short term.

Valuation

• The analysts have a consensus price target of $86.062 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 $110.0, and the most bearish reporting a price target of just $40.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.7 billion, earnings will come to $152.3 million, and it would be trading on a PE ratio of 53.1x, assuming you use a discount rate of 8.3%.
  
• Given the current share price of $60.0, the analyst price target of $86.06 is 30.3% higher.
  
• 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.