Lumentum stock price target raised on potential Nvidia deal

On Thursday, B.Riley updated its outlook on shares of Lumentum Holdings Inc (NASDAQ:), increasing the price target to $50 from $40 while maintaining a neutral rating. The adjustment follows Lumentum’s fourth-quarter earnings report, which exceeded market expectations, posting revenue of $308.3 million and earnings per share (EPS) of $0.06, surpassing the consensus estimates of $301 million in revenue and $0.02 EPS.

The company’s Cloud & Networking (C&N) segment experienced an 11% year-over-year decline, with both Telecom and Datacom sectors showing a quarter-over-quarter decrease. Despite this, management anticipates growth in the second half of the year for Telecom, albeit modest, and a flat to slight increase in Datacom in the first quarter, influenced by Alphabet’s (NASDAQ:) ongoing product transition.

A significant development for Lumentum was the announcement of a major transceiver award with a new client, speculated to be Nvidia (NASDAQ:). The potential collaboration with Nvidia could impact current suppliers if Lumentum becomes a significant provider for NVDA. However, the company’s Thailand facility must undergo a qualification process, and any revenue from NVDA is not expected until early 2025.

Lumentum has provided guidance for the first quarter’s revenue and EPS to be in the range of $315 million to $335 million and $0.07 to $0.17, respectively. This forecast is slightly above the consensus estimate of $311 million in revenue and $0.12 EPS. B.Riley has raised its FY25 EPS estimate from $1.37 to $1.63 and introduced an FY26 EPS estimate of $3.63.

The revised stock price target of $50 is based on an enterprise value-to-sales multiple of 2.8x, down from 3.0x, applied to the calendar year 2025 revenue estimate, adjusted for net debt. The firm suggests that it could become more positive on the stock if Nvidia’s role as a major customer is confirmed, which may not be determined for another two quarters.

In other recent news, the company has been successful in securing new customers, particularly a major AI transceiver customer and a new 800G Cloud Provider, which are expected to contribute to growth in the coming years. According to Needham and Jefferies, two reputable financial firms, Lumentum’s stock is poised for a rebound, with both firms raising their price targets for the company.

The optimism is driven by the company’s forecast for the first fiscal quarter and the projected growth of AI Transceivers and EML/CW chips. These product lines are expected to more than double in quarterly revenue from approximately $111 million to $215 million in the upcoming year.

Lumentum’s goal to increase its quarterly revenue to $500 million by the end of 2025 is backed by the company’s investment in new cloud and AI opportunities and a focus on enhancing production capacity.

Lastly, Lumentum’s CEO, Alan Lowe, discussed the company’s path to achieving its revenue target, highlighting growth from various areas including EML chips, datacom optical switching, and transceivers. The company’s acquisition of Cloud Light is expected to expedite high-speed transceiver production and contribute to substantial revenue growth. These are the recent developments that portray Lumentum’s potential for growth in the near future.

InvestingPro Insights

With Lumentum Holdings Inc (NASDAQ:LITE) navigating a challenging market environment, highlighted by a recent revenue decline and a dip in stock performance over the past month, investors have a complex landscape to assess. According to the latest data from InvestingPro, Lumentum holds a market capitalization of approximately $3.08 billion. The company’s gross profit margin stands at a healthy 29.14% for the last twelve months as of Q3 2024, signaling a solid ability to generate profit from sales despite the revenue downturn.

InvestingPro Tips suggest that management’s confidence is reflected in aggressive share buybacks, and while analysts expect a sales decline in the current year, they predict profitability for the company within the year. This juxtaposition of near-term challenges with management’s strategic decisions provides a nuanced view for potential investors. It’s worth noting that Lumentum does not currently pay a dividend, which may influence investment decisions for those seeking income-generating stocks.

For a more detailed analysis, including additional InvestingPro Tips for Lumentum, investors can explore the full suite of insights available on InvestingPro. There are currently 8 additional tips listed, offering a deeper dive into the company’s financial health and market position.

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