Lumentum LITE, known for its laser technologies and applications, has been demonstrating remarkable momentum with its shares surging 70.4% in the past six months, outperforming the broader Zacks Computer and Technology sector’s return of 6.6%. Over the same time frame, it also outperformed the Lasers Systems and Components industry and its peers, including IPG Photonics IPGP and Microvision MVIS.

In the past six months, shares of MVIS have gained 28.6%, while shares of IPGP have lost 17.4%. The industry appreciated 20.9% in the past six months.

While challenges exist, Lumentum's remarkable progress in growing its market share in the hyper-scaler industry and breaking into the artificial intelligence (AI) space has made the stock an alluring investment for investors.

Lumentum Holdings Inc. Price and Consensus

Lumentum Holdings Inc. price-consensus-chart | Lumentum Holdings Inc. Quote

Growth in the Hyper-Scaler Space Aids LITE’s Prospects

Lumentum is positioned at the forefront of high-performance computing solutions due to its accomplishments in the hyperscaler market. LITE's experience in this field may lead to new opportunities as cloud computing and data centers continue to develop and require ever-increasing speeds and capacities.

The company secured a second win in the 800G hyperscaler market, suggesting potential for growth in this high-performance computing segment. Furthermore, clients are already incorporating its 200G EMLs into their upcoming transceivers, which puts it in a strong position for the impending switch to 200G per lane.

Therefore, a successful hyper-scaler market could improve Lumentum's standing as a supplier of innovative technology and draw in more clients in related industries. In the rapidly evolving semiconductor industry, this could result in a positive feedback loop of innovation and expansion, enabling LITE to increase its product offerings and market share.

AI Deployments Bolster LITE’s Growth

Lumentum has been actively seeking expansion prospects in fields with high demand like advanced networking technologies and AI. The company's AI efforts, which could play a key role in its future growth trajectory, are being actively promoted. 

LITE's revenues for the first quarter of fiscal 2025 were $337 million, up 6% year over year. This remarkable recovery was fuelled by a 23% increase in Lumentum's revenues from its cloud and networking division, where its expanding use of AI infrastructure is driving up demand for its connectivity modules.

For example, Lumentum announced in August 2024 that several cloud and AI clients have chosen to deploy its externally modulated lasers (EMLs). In addition to achieving record EML shipments during that quarter, the company stated that it had secured enough bookings to last until fiscal 2025. Most significantly, due to the company’s quick AI deployments management expects Lumentum's addressable opportunity in the data center photonics market to jump to $16 billion in 2028 from $4.5 billion in 2023.

Analysts also seem optimistic about LITE’s growth prospects. The Zacks Consensus Estimate for fiscal 2025 revenues and earnings depict a year-over-year increase of 17.6% and 65.3%, respectively. LITE has surpassed the consensus mark for earnings in the trailing four quarters, with an average surprise of 38.3%.

Find the latest EPS estimates and surprises on Zacks Earnings Calendar.

Short-Term Challenges Persist for Lumentum

While Lumentum’s positioning in AI and cloud markets offer compelling long-term potential, several risks could weigh on its stock price in the near term. Its reliance on Asia-based manufacturing exposes it to geopolitical risks, particularly U.S.-China tensions.

Trade restrictions or export controls on advanced technologies could limit Lumentum’s ability to supply products to Chinese customers, which remain a significant portion of its revenue base. Additionally, the company’s efforts to shift production outside of China, while strategically sound, could increase short-term costs and operational complexities.

Lumentum’s performance in segments outside of datacom, particularly telecom and industrial, remains weak. While these segments were once significant contributors to revenues, ongoing softness limits overall diversification.

Developing and integrating new optical and photonic products that are suited to AI workloads may present technological challenges for Lumentum as it grows into AI infrastructure. The company needs to ensure that its products can handle the energy-efficient and high-speed data transmission demands of AI networks.

While Lumentum is actively promoting its expansion into AI, there are questions about the timeline and scale of revenue generation from these initiatives. The AI market is highly competitive, with numerous established players, such as Ciena, Cisco and Arista Networks ANET vying for market share. LITE's ability to differentiate its offerings and capture a significant portion of this market remains uncertain.

Zacks Rank

LITE currently carries a Zacks Rank #3 (Hold), implying that existing investors should hold the stock while new buyers should wait for a better entry point into the stock. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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