Optical and photonics component seller Lumentum Holdings (NASDAQ: LITE) delivered an outstanding performance on the stock market last year, registering healthy gains of 61% as investors took note of the growing impact of artificial intelligence (AI) on the company's business, and it looks like the stock's red-hot run is here to stay in 2025.
Lumentum released fiscal 2025 second-quarter results (for the three months ended Dec. 28, 2024) on Feb. 6. The company's growth trajectory continued improving during the quarter thanks to the robust performance of its cloud and networking business. It is worth noting that Lumentum finished fiscal 2024 on a sour note, as the weak demand for its optical components in the industrial segment and from telecom providers led to a sharp decline in its revenue and earnings.
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However, fiscal 2025 is turning out to be a much better year for the company as the demand for its optical components deployed in AI servers for high-speed data transmission is growing rapidly. Let's examine Lumentum's latest results and check why this company has room for more upside.
Lumentum's AI-driven growth is just getting started
Lumentum reported a 10% year-over-year increase in its fiscal Q2 revenue to $402 million, driven mainly by the AI-powered demand for its components in the cloud and networking business. More specifically, the cloud and networking segment's revenue increased 18% from the year-ago period, offsetting the 21% drop in the industrial business.
The cloud and networking business now accounts for 84% of Lumentum's top line, and the growing influence of this segment on Lumentum's top line should pave the way for stronger growth going forward. This explains why the midpoint of Lumentum's fiscal Q3 guidance of $417.5 million would translate into a 14% jump from the year-ago period.
Lumentum management points out that it is witnessing healthy demand from hyperscale cloud customers. More specifically, the demand from its largest hyperscale customer increased during the quarter, and it started volume shipments to a new customer. Even better, Lumentum's components are in the qualification phase at another customer. Management estimates that it will begin volume shipments to this new customer in fiscal Q4.
The good part is that the demand for Lumentum's components used in data centers is so strong that the company is increasing its manufacturing capacity. So, it won't be surprising to see Lumentum's growth indeed picking up as the year progresses. Analysts are forecasting the company to end the year with an 18% increase in revenue to $1.6 billion, followed by healthy growth over the next couple of years as well.
LITE Revenue Estimates for Next Fiscal Year data by YCharts
Lumentum management points out that its "engagement with cloud customers and AI infrastructure providers on their long-term technology and product roadmap has reached an all-time high." The shipments of its externally modulated lasers (EMLs), which enable high-speed data transmission with the help of fiber-optic cables, hit a record last quarter thanks to AI-related demand.
Looking ahead, Lumentum's EML shipments are likely to head higher as it expects to gain more market share on account of new design wins for AI applications. What's more, the data center interconnect (DCI) market that Lumentum is targeting is expected to grow by 71% over the next four years, according to one estimate, with AI set to play a central role in this market's healthy growth. So, Lumentum could be at the beginning of a terrific long-term growth opportunity.
Strong earnings growth could lead to impressive stock price upside
Another thing worth noting is that Lumentum's margins are getting better on account of higher manufacturing utilization and its focus on keeping costs under check. As a result, Lumentum's non-GAAP (adjusted) operating margin jumped by six percentage points year over year in the previous quarter. This led to stronger growth of 75% in the company's bottom line last quarter to $0.42 per share.
Consensus estimates are projecting a 73% increase in the company's bottom line this year to $1.75 per share, followed by outstanding growth over the next two years as well.
LITE EPS Estimates for Next Fiscal Year data by YCharts
Assuming Lumentum could hit $4.74 per share in earnings in fiscal 2027 and trades at 27.6 times earnings at that time (in line with the tech-laden Nasdaq-100 index's forward earnings multiple), its stock price could hit $131 in just over two years. That would be a 60% jump from current levels, suggesting that this AI stock has the potential to fly higher even after clocking impressive gains last year.
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool recommends Lumentum. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
