Lumentum (LITE) shares closed 1.8% higher yesterday, August 18, after the optical and photonic product manufacturer and supplier reported solid revenues and gross margins in its fourth-quarter fiscal 2021 results.
A 6.5% revenue growth and 50 basis points expansion in adjusted gross margin, year-over-year, were major positives. (See Lumentum stock charts on TipRanks)
Management attributed the tailwinds to high demand for its products. It also noted that demand is increasingly shifting towards differentiated products that offer next-generation customer solutions, in a change that is expected to drive growth for the company. Solid demand for indicator products such as Pump Lasers and ROADMs was remarkable.
However, a 2.5% year-over-year decline in non-GAAP net income was an overhang on the quarterly results. Unquestionably, the ongoing global shortage of semiconductor components dragged down the bottom line. Moreover, the shortage is expected to persist through the first quarter of fiscal 2022 and cause more than $30 million of revenue loss. Importantly, ROADMs are expected to face the majority of the revenue loss.
Additionally, Lumentum expects a sequential decline in Telecom & Datacom revenues, as the company plans to utilize buffer inventories from the fourth quarter. Lumentum is struggling to satiate the strong demand amid persistent supply constraints.
Needham analyst Alex Henderson assessed the quarterly performance as well as the current macroeconomic events and their impacts on Lumentum. Based on his evaluations, Henderson raised his estimates for the company for the fiscal year 2022, despite a change in Lumentum’s NG-Tax Rate that has garnered an artificial cost on the bottom line.
“Despite these artificial and external headwinds, strong demand is driving better than expected outlooks in Industrial Lasers, Data Comm chips, and longer-term demand for both Telecom Transport and Transmission products and even 3D Sensing,” he noted.
The analyst believes that the share of Lumentum in the 3D Sensing market has improved. He is confident that smaller die-sized components and better product functionality, supplied for the next-generation smartphone of its top customer — Apple (AAPL)— should help Lumentum at least maintain,, if not grow, its market share.
Henderson said, “We expect 3D to rebound starting in CY4Q22 as production for Android ramps and other 3D products and markets offset the pressures on the Apple 3D business. However, we think Lumentum will likely be able to maintain its share at Apple, or potentially even pick share backup with the ramp of Apple’s next-generation products.”
Henderson thinks Lumentum is a worthy Buy, and increased the price target to $105 from $100, indicating a 28.6% upside potential.
Justifying his rating and price target raise, he said, “Lumentum benefits from dominant positions in critical segments of the optical market where its superior technologies can command above-industry average Gross Margins and sustain differentiated technology advantages.”
Additionally, he expects Lumentum to benefit from the adoption of 5G phones, the onset of World Facing 3D modules in the fiscal year 2022, and growth in 3D in the Android market.
The Wall Street consensus, however, is cautiously optimistic about Lumentum, with a Moderate Buy based on 2 Buys and 3 Holds. The average Lumentum price target of $91.4 implies 11.9% upside potential from current levels over the next 12 months.
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
