Company Reports

We initiate coverage on Coherent and Lumentum, two major suppliers of photonics components. Both firms specialize in indium phosphide lasers and transmission modules that power fiber networks and will compete in near- and co-packed optics, the next generation of artificial intelligence connectivity.

Lumentum is a leading supplier of optical and photonics components, and we expect it to maintain its strong competitive position as artificial intelligence infrastructure drives greater demand for high-speed optical connectivity. Lumentum has established positions in lasers, optical components, and transmission technologies, with a growing presence in high-speed transceivers, all of which allow systems manufacturers and hyperscalers to replace copper with fiber.

We are no longer providing equity research on Lumentum. We provide broad coverage of more than 1,500 companies across more than 140 industries and adjust our coverage as necessary based on client demand and investor interest.

We are placing our fair value estimates for Lumentum, Finisar, and Viavi under review. We will publish updated reports and valuations by March 30.

Lumentum Holdings is a spin-off of JDS Uniphase with its predecessor's optical component and commercial laser operations. Despite Lumentum's domain expertise in optical communications components that face robust demand, the firm has not demonstrated its ability to sustain pricing power because of a sporadic purchasing pattern and fragmented market structure. 3-D sensing in consumer electronics could provide a windfall in revenue, but the laser diode business is quickly becoming crowded in anticipation of overcoming demand and we don't think Lumentum can carve out an economic moat in this business.

Lumentum posted second-quarter results that well exceeded our expectations and management’s guidance on both the top and bottom lines. Sales from 3-D sensing (3DS) laser and commercial lasers came in ahead of our expectations and were more than enough to offset top-line weakness in telecom and Datacom optical products. Although the firm expects sales for the March quarter to drop by about $100 million sequentially at midpoint, this is mainly related to the softer follow-through bookings on iPhone X. We see more evidence pointing to a strong recovery in 3DS revenue starting in the second half of calendar 2018 from Android clients. In addition, Lumentum saw recovery in demand for telecom products in both North America and China and continued strength of its commercial laser business. As we have already accounted for such positive factors in our model, we maintain our fair value estimate of $55 for this no-moat name and believe shares are undervalued right now.

Apple announced on Dec. 13 that it has awarded $390 million to Finisar to build out capacity and ramp up production of vertical-cavity surface-emitting lasers, VCSELs, used in Apple's 3-D sensing applications like FaceID. Finisar will use the money, which comes from Apple's $1 billion Advanced Manufacturing fund, to develop its recently purchased 700,000-square-foot facility in Sherman, Texas, to produce VCSELs using 6-inch wafers as early as the second half of 2018. This confirms our most important growth thesis on Finisar, as we have been expecting it to expand its 3-D sensing market share in the long run from this fast-growing vertical. We are maintaining our no-moat rating and $30 fair value estimate for Finisar, as our valuation estimates have already assumed material top-line contribution from 3-D sensing. We still consider the stock undervalued after a 28% rally in early-market trading. We are also maintaining our $55 fair value estimate and no-moat rating for Lumentum, which is down 11% today, as our valuation assumptions have already considered that Lumentum would not emerge as the dominant VCSEL provider to Apple or the rest of the industry.

Lumentum Holdings is a spin-off of JDS Uniphase with its predecessor's optical component and commercial laser operations. Despite Lumentum's domain expertise in optical communications components that face robust demand, the firm has not demonstrated its ability to sustain pricing power because of a sporadic purchasing pattern and fragmented market structure. 3-D sensing in consumer electronics could provide a windfall in revenue, but the laser diode business is quickly becoming crowded in anticipation of overcoming demand and we don't think Lumentum can carve out an economic moat in this business.

Lumentum’s first-quarter results for fiscal 2018 were weaker than our expectations, with total revenue down 6% year over year versus our projection of a 2% decline. This is due to weaker performance in telecom and datacom optical products and commercial lasers. However, 3D sensing revenue outlook again is the market's main focus. Thanks to strong 3D sensing booking, management expects second quarter revenue to be between $345 million and $375 million, which is in line with our existing projection at midpoint. While profitability was weak this quarter with a 12% non-GAAP operating margin, up from last quarter’s 9% margin, the firm also guided margin to jump to 21%-23% in the coming quarter primarily due to anticipated favorable product mix and recovery of margin in the commercial laser segment. After raising our revenue and margin projections for fiscal 2018 and beyond, we are raising our fair value estimate to $55 per share, up from $50, for this no-moat stock. However, we consider shares modestly overvalued at current price, which reflects bullish growth and margin expectations for the firm.

Lumentum Holdings is a spin-off of JDS Uniphase with its predecessor's optical component and commercial laser operations. Despite Lumentum's domain expertise in optical communications components that face robust demand, the firm has not demonstrated its ability to sustain pricing power because of a sporadic purchasing pattern and fragmented market structure. 3-D sensing in consumer electronics could provide a windfall in revenue, but the laser diode business is quickly becoming crowded in anticipation of overcoming demand and we don't think Lumentum can carve out an economic moat in this business.

Lumentum Holdings is a spin-off of JDS Uniphase with its predecessor's optical component and commercial laser operations. Despite Lumentum's domain expertise in optical communications components that face robust demand, the firm has not demonstrated its ability to sustain pricing power because of a sporadic purchasing pattern and fragmented market structure. 3-D sensing in consumer electronics could provide a windfall in revenue, but the laser diode business is quickly becoming crowded in anticipation of overcoming demand and we don't think Lumentum can carve out an economic moat in this business.

Lumentum Holdings is a spin-off of JDS Uniphase with its predecessor's optical component and commercial laser operations. Despite Lumentum's domain expertise in optical communications components that face robust demand, the firm has not demonstrated its ability to sustain pricing power because of a sporadic purchasing pattern and fragmented market structure. 3-D sensing in consumer electronics could provide a windfall in revenue, but the laser diode business is quickly becoming crowded in anticipation of overcoming demand and we don't think Lumentum can carve out an economic moat in this business.

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.

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.

Lumentum Holdings is a spin-off of JDS Uniphase with its predecessor's optical component and commercial laser operations. Despite Lumentum's domain expertise in optical communications components that face robust demand, the firm has not demonstrated its ability to sustain pricing power because of a sporadic purchasing pattern and fragmented market structure. 3-D sensing in consumer electronics could provide a windfall in revenue, but the laser diode business is quickly becoming crowded in anticipation of overcoming demand and we don't think Lumentum can carve out an economic moat in this business.

We are launching coverage of Lumentum Holdings with a $46 fair value estimate and no moat rating and stable moat trend. Despite Lumentum’s domain expertise in optical communications components that face robust demand, the firm has not demonstrated a proven ability to earn excess returns on capital due to sporadic purchasing pattern from customers and a fragmented market structure. 3-D sensing in consumer electronics could provide a windfall in revenue, but the laser diode business is quickly becoming crowded in anticipation of upcoming demand and we don't think Lumentum can carve out an economic moat in this business.

Lumentum Holdings is a spin-off of JDS Uniphase with its predecessor's optical component and commercial laser operations. Despite Lumentum's domain expertise in optical communications components that face robust demand, the firm has not demonstrated its ability to sustain pricing power because of a sporadic purchasing pattern and fragmented market structure. 3-D sensing in consumer electronics could provide a windfall in revenue, but the laser diode business is quickly becoming crowded in anticipation of overcoming demand and we don't think Lumentum can carve out an economic moat in this business.