Lumentum Fared Well Despite Soft Demand in China and Got 3D Sensing Orders; Shares Fairly Valued

Lumentum posted decent third-quarter results for fiscal 2017 that are largely in line with our expectations. Total revenue grew 11% year over year on double-digit year-over-year growth in both optical communications (networking devices and components) and laser segments. According to management, demand in China slowed down significantly in late the March quarter and would continue into the June quarter, which is consistent with what we see in earnings results from other optical component makers. Such softness was cushioned by strong growth in North America, especially in metro networks and data center interconnects. We still believe network upgrade in China remains a medium-term growth driver, but the timing of such demand is delayed by a few quarters. On a positive note, management confirmed that it has received orders on 3D sensing laser diode to be delivered in the September. We are reiterating our no-moat rating for Lumentum. After factoring in lowered near-term outlook on telecom spending, we are maintaining our fair value estimate at $46 per share, as we already projected a healthy dose of revenue lift from 3D sensing in 2018. We consider shares fairly valued after a 10% jump today.