A pivotal inflection point for the Optical group is at hand.
A few weeks ago Ciena Corp. (CIEN) stated the company had seen a "material increase in business activity” since its Q2 report in early June, describing Cloud orders as "through the roof."
June 30, Ciena price target raised to $100 from $85 at Northland
Northland raised the firm's price target on Ciena to $100 from $85 and keeps an Outperform rating on the shares. Ciena last week noted a material increase in business activity since earnings just a few weeks ago, and described Cloud demand as "through the roof," the analyst tells investors in a research note. Ciena noted supply constraints limiting its ability to respond to the significant uptick in near term demand, pushing demand strength into FY26 for the group of June fiscal year-ended suppliers and also putting upward pressure on Ciena's fiscal 2026 growth outlook, the firm says.
As AI clusters become more complicated and exponentially larger to connect, the need for more advanced optical wiring will accelerate meaningfully in the next 2-3 years.
Lumentum Holdings Inc. (LITE), a maker of optical and photonic products, has a series of new product lines simultaneously inflecting, coalescing to form a meaningful inflection point for the company.
On May 6, Lumentum reported an impressive Q3 beat and foresaw continued momentum ahead:
New CEO, Michael Hurlston, noted:
“In my first 90 days as CEO, it’s become clear that Lumentum is uniquely positioned to lead as the convergence of optics and electronics accelerates AI data center scaling.
Our innovations—from advanced EMLs to ultra-high-power lasers—are driving transformative power efficiencies across cloud, AI, and long-haul networks, making us an essential partner in this next era of connectivity…
“In Q3, we exceeded the high end of our guidance for both revenue and EPS, fueled by strong demand from cloud customers and a recovering networking market. Despite ongoing macroeconomic volatility, we believe AI-driven cloud growth will continue to drive our financial momentum into Q4 and beyond.”
What’s more, Hurlston spoke confidently about achieving a $500M quarterly run-rate by the end of CY25.
We’re still very much on track for the $500 million by the end of the year. We’re obviously not guiding, we’re guiding a quarter at a time, but we feel pretty pleased about where the company is setting up, and still, as we said in the remarks, are very much on track for the $500 million quarter.
We believe most Buy Side guys have not looked at LITE in years.
As revenues accelerate to 50% growth in Q4 and see further growth in the September quarter, we expect this momentum to catalyze a parabolic move in LITE over the next 6 months.
Check out the forthcoming ramp:
Earnings are poised to almost triple the next two years. We see $6 in EPS two years out.
We think LITE's multiple will expand to the mid-to-high 20s, which gets us to $150-$160 the next six months as big investors model the likely $6 in earnings power, two years out, as we have done.
Importantly, the new CEO is very focused on scrapping margin-degradation opportunities in the Industrial sector and, instead, has his eye on the higher-growth and higher-margin AI cluster product lines. Take a look at this longer-term model:
Three years out, we believe LITE could earn $7.50-$8.00 in peak earnings. A 25x multiple on $7.50-$8.00 could get the stock to $200 over the next 18mo – should our bullish scenario develop.
On the technical side, LITE has been base-building for the past 4.5 years. This long-term base is powerful:
If we are correct and our thesis plays out, LITE should soon move to all-time highs above the $112 level. We think a spirited move will commence one this level is taken out.
In the short term, LITE is extended as it closes in on its Q4 report in early August. The market has been alerted to the acceleration in the Opticals.
As we have observed with the impressive reports from NFLX and JPM, which turned into sell-the-news events, the biggest risk on LITE in the near-term is the stock has already enjoyed a major run into the print.
Given the run-up, we plan on taking a medium-size position in LITE for now. We plan to add on dips toward $100.
Conversely, our inclination is to size up our stake whenever LITE moves to all-time highs – sometime after the August print, we assume. As such, we are not rushing into a full-size position today or in the near-term.
STOP LOSS: We plan to use a $95 STOP on LITE.
We have Conviction Level 10 on our long-term thesis playing out. What it does after the print in two weeks is less certain, so we attach a Conviction Level of 7 to LITE in the short-term.
Tariff and supply chain risks remain front and center for Lumentum. The company is taking steps to shift production to Thailand from China to minimize the impact of the tariff wars. However, the situation is fluid and difficult to model given the unpredictable nature of the Trump administration.
On the Q3 call, Management mentioned “ongoing macroeconomic headwinds” in the Industrial Laser space. Should these headwinds get materially worse, they could negatively impact earnings. However with so much of the company focus on the secular opportunities in AI and the Cloud, we do not think this is a major risk.
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Disclosure: We are long LITE stock and calls. We may change our positioning at a moment’s notice, without notifying you of any such moves.
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