Shares of Lumentum Holdings (LITE) gained momentum after the optical and photonic products manufacturer raised its fiscal fourth-quarter guidance above prior expectations and announced it will reach a key revenue milestone sooner than anticipated.
What does Lumentum do?
Lumentum designs and manufactures optical and photonic products enabling optical networking and laser applications worldwide and has expertise in foundational Technologies critical to AI.
Why Lumentum’s Momentum Is More Likely to Continue
Lumentum’s upbeat outlook, strong competitive positioning, robust and innovative product technology, and strategic shift of manufacturing footprint out of China into Thailand appear to be positive developments for investors.
Improved Guidance: The company now expects to achieve $500 million in quarterly revenue in Q1 FY26 – one quarter ahead of its previous timeline—signaling stronger-than-expected business momentum.
For Q4, Lumentum raised its adjusted earnings per share (EPS) forecast to $0.78–$0.85, up from prior guidance of $0.70–$0.80, and ahead of the $0.75 consensus. This is way higher than the $0.57 eps that it reported for Q3.
It also revised its revenue outlook upward to $465 million–$475 million, compared to the previous range of $440 million–$470 million, topping the $457.46 million consensus estimate. This is also sequentially higher from the $425.2 million reported for Q3.
The operating margin forecast was raised as well, now projected at 14%–15%, versus the earlier 13%–14% range, also higher than 10.8% operating margin in Q3.
Lumentum reaffirmed its longer-term goal of reaching $600 million in quarterly revenue by Q4 FY26 or Q1 FY27.
The updated guidance is higher sequentially and reinforces confidence in Lumentum’s growth prospects. The company sees its markets growing at a greater than 25% compound annual growth rate over the next five years, driven by an accelerating convergence of optics and electronics.
Lumentum has long-term goals of revenue of $750 million a quarter (or $3 billion a year), gross margins above 40% and operating margins greater than 20%. Majority of revenue growth and Greater than 1100 bps of margin expansion are expected to come from AI and cloud businesses.
Strong competitive positioning: Despite broader uncertainty, Lumentum’s cloud business continues to remain a bright spot. Cloud & Networking revenue climbing 8% quarter-over-quarter and 16% year-over-year on strong hyperscaler demand.
Lumentum builds optical components for every type of network virtually. Lumentum said in its Q3 earnings call that it has already secured three major cloud transceiver customer wins and more are expected, thanks to its components being embedded throughout the ecosystem, including within competitor transceivers. In other words, even when a rival supplies the full module, Lumentum still benefits. In Q4, Lumentum expects its overall cloud transceiver revenue to grow over 50% sequentially.
It set a record for its EML chipset shipments in the third quarter of 2025, and remains on track to more than double this business by the end of calendar 2025.
Strategic navigation of tariff landscape: Higher material costs and tariffs will dent Lumentum’s Q4 gross margin by 100-basis-points, yet it sees a sequential increase in gross margins from Q3.
Lumentum’s decision to expand manufacturing in Thailand while moving out of China looks like smart hedging in an increasingly volatile trade landscape. With Trump’s unpredictability and Xi Jinping’s hardline posture, a quick resolution to the China-U.S. standoff seems unlikely.
For most of its shipments, Lumentum is not the importer of record, which has simplified tariff-related conversations with customers. As the company explained on its Q3 earnings call:
“As there’s been noise on tariffs, we’ve been speaking to our customers about how we work through the pricing impact to them that is associated with those tariffs. But up until now, for the large part, most of our shipments that come to the U.S., we are not the importer of record. And because we are not the importer of record, those conversations have been a lot simpler…”
Risks
- Just as higher returns, the drawdowns can be sharp for a tech stock like LITE. This can be seen in its performance vs. S&P 500.
LITE’s 1-Year Price Return: 80% vs. S&P 500’s 12%
LITE’s 6-month Price Return: -11.6% vs. S&P 500’s -1.4%.
- Any future developments hinting at slowing/stalling growth will likely hit the stock.
- Lumentum’s shift to Thailand is a strategic China hedge for risk mitigation, not risk elimination. It still operates in a globally intertwined, policy-sensitive supply chain and Thailand may not exactly be tariff-proof.
Lumentum Stock Valuation
Lumentum shares are currently trading 20% off their 52-week intraday-high of $104. LITE stock has a forward Price-to-earnings/Growth (PEG) of 0.60. A PEG below 1 typically suggests a stock may be undervalued relative to its growth prospects. LITE stock’s forward PEG is also way below the sector average of 1.73 and its own 5-year historical average of 1.95. A conservative rerating of PEG to just 0.75 represents about 25% upside from current price levels of around $82, implying a number in the proximity of its 52-week intraday high.
Please note that I am not a registered investment advisor and readers should do their own due diligence before investing in the stocks mentioned in the article, or any other stock. I am not responsible for the investment decisions made by individuals after reading this article. Readers are asked not to rely on the opinions and analysis expressed in the article and encouraged to do their own research before investing.
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