There’s Still Time to Invest in Lumentum’s Optical Networking Momentum

Earlier this week, shares of Lumentum (LITE) rallied from about $806 to $1,049. Nvidia (NVDA) CEO Jensen Huang praised Marvel (MRVL), a maker of optical components, as the next potential trillion-dollar company. Not only did that spark a massive rally in Marvell shares, but it also sparked a rally in other optical-component stocks, like LITE.

Investors are rushing to buy optical networking companies, like LITE, because they’ve become an essential part of the artificial intelligence boom. That’s because optical networking, which transmits data as pulses of light, can deliver far more bandwidth and higher speeds than traditional copper wiring. In addition, Nvidia announced a $2 billion multi-year agreement with LITE in March to help accelerate the adoption of advanced optical technologies. Together with Lumentum, Nvidia is advancing the world’s most sophisticated silicon photonics to build the next generation of gigawatt-scale AI factories,” said Jensen Huang, as quoted in a company press release.

The AI Boom Could Spark a $154 Billion Optical Networking Opportunity

According to Goldman Sachs, optical networking is quickly becoming the next hot trend for the AI boom, as demand drives the need for faster data exchange and lower latency. In fact, "Networking is the next frontier in AI infrastructure, poised to enhance computing capability through seamless data exchange and low latency,” as quoted by Economic Times.

The firm added that the total addressable market could increase from about $15 billion in 2026 to nearly $154 billion by 2028. In addition, the market is also seeing a massive supply-demand issue. For example, Nvidia wants suppliers to increase indium phosphide laser capacity by 20x through 2030. “Training clusters increasingly require tens of thousands of GPUs connected with ultra-fast optical interconnects so data can move with minimal latency. Copper cables simply cannot keep up at scale," according to Rosenblatt Securities.

To help secure capacity, Nvidia committed $2 billion to companies like LITE.

Lumentum Highly Favored as Demand Exceeds Supply

In its most recent quarter, the company posted adjusted EPS of $2.37, as compared to estimates of $2.27. GAAP EPS of $1.50 was above estimates of $1.43. Revenue, up about 90% year-over-year (YOY) at $808.4 million, was below estimates of $810 million. It posted an adjusted gross margin of 47.9%, which was above estimates of 45%. Moving forward, thanks to demand exceeding supply, the company expects revenue to range from $960 million to $1.01 billion. The midpoint is $980 million, which is far greater than the expected $936 million. It expects EPS to range from $2.85 to $3.05. That midpoint of $2.95 is better than the estimates of $2.75.

What Do Analysts Say About LITE Stock?

Analysts at Needham reiterated a “Buy” rating on LITE with a $1,040 price target, citing it as a “top pick.” Morgan Stanley raised its price target to $900 from $710 with an “Equal Weight” rating.

Of the 21 analysts covering the LITE stock, 14 have a “Strong Buy” rating, two have a “Moderate Buy” rating, and five have a “Hold” rating. The mean target price of $1,111.55 implies 17.6% potential upside from current levels. Meanwhile, the high-end target of $1,400 implies as much as 48.14% possible growth from here.