LITE - Why Lumentum Is A Buy In 2024

2023-05-30 14:27:34 ET

Summary

• Lumentum Holdings Inc. posted a weak quarterly report for a second time.
• Outlook for the next quarter is equally disappointing.
• Inventory glut is a core issue that Lumentum must work through in 2023.

Weak Investors who listened to the Quant "sell" rating avoided losing more money holding Lumentum Holdings Inc. ( LITE ). Still, those who did not notice the 2.04/4.0 sell warning are in luck. Nvidia Corporation ( NVDA ) led renewed buying for any firm with product stemming from artificial intelligence ("AI"). This lifted LITE stock from a post-earnings low of ~ $42 to nearly $54.

Investors should ignore the stock price noise and look more closely at Lumentum’s fiscal first-quarter results . Revenue fell by 3%. For the next quarter, its diluted earnings per share should fall short of the consensus expectations.

Lumentum Posted Weak Q3 2023 Results

Lumentum posted net revenue of $383.4 million, down by 3% Y/Y. The press release quoted Alan Lowe, President and CEO reflecting on “the impact of customer inventory digestion.” Furthermore, the CEO believes the company is “currently under-shipping end-market demand across our business.”

On a GAAP measure, the firm lost $31.7 million or 46 cents a diluted share. Its non-GAAP net income of positive $51.8 million ($0.75 per diluted share) subtracts the amortization of acquired intangibles worth $66.4 million. It excludes the stock-based compensation ("SBC") of $19.1 million and the fair value of acquired inventory worth $17.8 million.

Barclays threw the towel by downgrading the photonic technology firm. It said that Lumentum had one too many resets with its weak quarter and its guidance. Readers are better off relying on the quant rating history. The system rated the stock as either a hold or sell since the start of 2021. Shares have lost half their value since then.

Opportunity

Lumentum Holdings Inc. shareholders who are not giving up hope must grasp any faint opportunities ahead. First, assess the headwinds ahead. Customers are holding excess inventory, driving demand for ROADM solutions lower. CEO Lowe said that the firm struggled heavily from constraints for ROADM line cards in the past year . This will continue into the June quarter and beyond.

Customers are no longer concerned about supply constraints. As a result, they lowered their inventory to brace for their weaker sell-through volumes ahead. Lumentum is under-shipping to end markets low enough that it lowered its outlook.

Outlook

In the next quarter, Lumentum Holdings Inc. expects net revenue of $350 million to $380 million. Non-GAAP operating margin is as low as 8.5%, while non-GAAP diluted earnings per share is between $0.45 to $0.65. Analysts expected $0.78.

The business will not snap back until Lumentum’s inventory levels normalize.

The company’s ultrafast laser business is strong. The segment grew by 70% Y/Y as it entered into new markets. Still, the weak semiconductor demand is dragging demand for fiber laser lower. This suggests that the recent stock rally will not last. Ongoing demand softness will continue from here.

Catalysts

Without clarity in the supply channels, Lumentum is guessing that it will under-ship products for a few quarters. Until the company reports stronger customer demand, investors who buy the stock now are taking risks. The stock has weak grades on all metrics except for profitability.

The revisions from A- to D+ aligns with Lumentum posting weak results last quarter. It already warned investors that it will post weak results again next quarter.

Investors should be aware that artificial intelligence is not a catalyst. Nvidia may announce general launches, like this Ethernet-based AI cloud . Markets are receptive to such press releases. On the call, analyst Alex Henderson asked how AI is a bright spot. Lumentum said that the VCSELs of 100-gig per lane are about to enter mass production. The 200-gig per lane product is also in the pipeline. However, accelerated demand will take a few quarters.

Investors should expect meaningful demand to take a few years. New customers need time to review the optical architectures. Customers have a tighter spending budget amid the economic recession. They will not spend heavily on AI-related hardware to build their next-generation data center. They must first validate the demand for such computing power is present.

Your Takeaway

Lumentum Holdings Inc. investors who recognized the excess inventory in this sector avoided heavy investment losses. From here, Lumentum needs its customers to digest the excess supply. The new products should not enter the markets and add to results for at least one or two years.

Add Lumentum Holdings Inc. stock to the watch list. The company’s prospects should improve in calendar 2024, when it should have a more receptive customer base willing to increase purchasing Lumentum products.

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