Lumentum Holdings (NASDAQ: LITE), a lesser-known name among investors, has emerged as a rising star in the AI-driven stock market. Over the past four and a half months, the company’s shares have surged by an impressive 84%, driven by strong demand for its optical and photonic components critical for AI workloads.
Turning Challenges Into Opportunities
Despite a challenging fiscal 2024, during which Lumentum reported a 23% decline in revenue to $1.36 billion and a sharp drop in adjusted earnings to $1.01 per share, the company is showing signs of a remarkable turnaround. The slowdown was primarily due to weaker demand in the industrial segment, which saw a 38% revenue drop, and in its cloud and networking segment, where revenue declined by 18%.
However, Lumentum’s first-quarter fiscal 2025 results suggest a brighter future. Revenue for Q1 increased by 6% year-over-year to $337 million, exceeding expectations. The growth was fueled by a 23% jump in revenue from its cloud and networking segment, driven by soaring demand for AI-related connectivity modules.
AI Infrastructure Fuels Growth
A significant contributor to Lumentum’s recent success is its externally modulated lasers (EMLs), used for high-speed data transmission via fiber optic cables. In August 2024, the company reported record shipments of EMLs and secured robust bookings that will be fulfilled throughout fiscal 2025. Management anticipates a 30% to 40% increase in EML demand this fiscal year and is scaling production capacity to meet this surge.
Lumentum estimates its addressable market in data center photonics, driven by AI deployment, will grow to $16 billion by 2028, up from $4.5 billion in 2023.
Promising Outlook for 2025 and Beyond
Analysts remain optimistic about Lumentum’s near-term and long-term prospects. The company expects Q2 fiscal 2025 revenue to reach $390 million, up 6% from the prior year, and forecasts adjusted earnings per share of $0.35, signaling continued improvement.
Over the next two fiscal years, earnings are projected to grow significantly—56% in fiscal 2025 and an additional 134% in fiscal 2026. If Lumentum achieves its forecasted earnings of $3.70 per share by 2026 and trades at the Nasdaq-100 index’s average price-to-earnings ratio of 33, its stock price could climb to $122, representing a 47% increase from current levels.
Investment Considerations
While Lumentum’s AI-driven growth trajectory appears strong, it’s important for potential investors to weigh their options carefully. The company’s substantial backlog and increasing role in the AI networking market suggest it is well-positioned to capitalize on the industry’s expansion.
However, The Motley Fool’s Stock Advisor analysts have identified other stocks they believe could deliver even greater returns in the years ahead, highlighting the importance of diversifying investment choices.
As Lumentum continues its AI-fueled rise, it remains a compelling option for those looking to capitalize on the transformative potential of artificial intelligence in the tech industry.
