Citi initiates Lumentum coverage with Buy, citing AI optics leadership

[Lumentum Corporate Headquarters in San Jose, California, USA]
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Citi initiated coverage on Lumentum Holdings (NASDAQ:LITE [https://seekingalpha.com/symbol/LITE]) with a Buy rating, expecting more upside in the stock, beyond its current 60.17% rise on a year-to-date basis. The brokerage expects the company to benefit from its more diverse, versatile AI optics portfolio, supplying key components for pluggable, Optical Circuit Switch (OCS [https://seekingalpha.com/symbol/OCS]) and Co-Packaged Optics (CPO).

The brokerage assigned a target price of $165 to the stock, translating to about a 22% upside from Thursday’s close.

Analyst Papa Sylla said that LITE is well-positioned to outpace both the company and the Street’s longer-term expectations with the ramp of its industry-leading Electro-absorption Modulated Laser (EML [https://seekingalpha.com/symbol/EML]) and its new AI products in emerging markets such as OCS and CPO.

“We expect LITE to continue benefiting from the ongoing pivot to single-mode InP-based lasers. We estimate LITE will likely continue to be a share leader in AI EML lasers at ~50% of shares as it is, a key supplier to transceiver leaders such as Innolight and Coherent,” Sylla noted.

Citi sees Lumentum holding about 50% of the AI EML market share and a low-single-digit share of AI transceivers by FY2026.

Beyond the AI story, the analysts were also bullish about the company’s higher growth perspective and faster margin expansion compared to peers like Cohrerent (COHR [https://seekingalpha.com/symbol/COHR]).

“As the need for faster and more reliable optical connections increases with AI, we think LITE’s 20+ years of Indium Phosphide (InP) technology leadership should continue to bear fruit via innovation both on the laser front and increasingly on the module front. With that in mind, we model sales growing at a 29% CAGR over the next 3 fiscal years,” Citi added in its note.

Overall, Wall Street analysts have rate LITE as Buy. Seeking Alpha analysts are also bullish on the stock and gave it a Strong Buy rating.

In the past one year, California-based Lumentum has gained [https://seekingalpha.com/symbol/LITE/charting] over 141%, far outpacing the S&P500 index’s 16% rise.

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