SerpApi.Org
Optical-networking stocks have come back down to earth in recent months, and a Barclays analyst thinks that Lumentum Holdings shares now look attractive in the wake of their selloff.
On Monday, Barclays’s Tom O’Malley upgraded shares of Lumentum to overweight from equal-weight as the company ramps up a number of opportunities in networking. He called optical components “the most interesting subsector” when evaluating a pullback in the broader semiconductor universe.
Shares of Lumentum closed up roughly 4.5% on Monday.
Since joining the S&P 500 in March, Lumentum has been a standout in the index this year, reflecting how artificial intelligence has led to robust demand for optical technology. Lumentum has been growing in stature, and in May it became sizable enough to join the Nasdaq-100
Lumentum’s stock is up 637% in the last 12 months, but it’s down 27% from its peak achieved on May 11. Shares of Lumentum have lagged the PHLX Semiconductor Index by roughly 36 percentage points in the last three months, according to Dow Jones Market Data.
O’Malley wrote in his Monday note that the underperformance may be the result of a “rotation into other AI bottlenecks” like memory.
Lumentum designs co-packaged optics, or optical components important for “scale-up” networking. That technology boosts the capacity of one system, as opposed to “scale-out,” which focuses on connecting systems and racks into larger clusters.
Read more: Meet Kimi K3, the newest Chinese AI model haunting Silicon Valley
Yet concerns have been brewing over delays in when co-packaged optics will be used at scale. O’Malley wrote that scale-up volume won’t become “material” until 2029 or 2030.
However, he said that as stock multiples have come down for Lumentum and Coherent in recent months, he sees optics as “a lot more interesting” from a valuation perspective, as “nothing has changed fundamentally.”
O’Malley views Lumentum as being oriented around its primary business of lasers and transceivers, while co-packaged optics is an “add-on once we get towards the end of the decade,” he said.
Needham analyst Ryan Koontz told MarketWatch that while Lumentum has been impacted by speculation about the ramp-up of its co-packaged optics, which it develops for Nvidia he described it as a “very challenging new technology” and said delays are to be expected.
Even so, Koontz is more bullish about the company’s revenue potential in near-packaged optics designs, which have lower development risk but “a large portion of the advantages of” co-packaged optics.
In April, CEO Michael Hurlston said in a Bloomberg interview that Lumentum’s products are sold out through 2027, as manufacturing hasn’t caught up with hyperscaler demand.
Earlier this month, Hurlston told CNBC the company is “trying to build up our capacity as much as we possibly can to fulfill a demand that we see out five years at this point.”
See also: AMD’s stock climbs, and a new Microsoft deal is only part of the reason
