Lumentum Saw Strong 3D Sensing Bookings but Weak Telecom Demand in China; Raising FVE to $50

Lumentum’s fourth-quarter fiscal 2017 results were relatively weak with total revenue of $222.7 million, at the low end of the guided range of $220 million-$235 million and down 13% from the third quarter due to continued weakness in telecom demand in China, which management expects to persist over the next two quarters. However, Lumentum's management announced robust 3D sensing bookings that reinforced our growth thesis for the manufacturer of the VCSEL laser in the 3D sensing module of the upcoming iPhone X. We believe the near-term weakness in telecom demand is more than offset by the 3D sensing opportunity. As we rolled our model with lower telecom revenue but far higher 3D sensing revenue outlook than previous estimates, we are raising our fair value estimate to $50 per share from $46 for this no-moat stock. Trading in 3-star territory, we recommend a wider margin of safety before investing in this name.