Lumentum Reports Solid Earnings but High Valuation; UBS Raises Target Price, Maintains Neutral Rating

Overview

Following Lumentum's March 2026 fiscal quarter earnings release and channel research at the March OFC industry conference, UBS substantially revised its multi-year forecasts for the company. The report asserts that demand for high-speed optical devices (100/200G EML, OCS, CPO, and optical modules) from AI data centers will support strong growth for the company over the coming years, leading to significant upward revisions of FY26-FY28 earnings forecasts and raising the 12-month target price from $455 to $960. However, as the stock price has risen approximately 114% over the past three months, the current stock price is already close to or even higher than the target price. UBS maintains a 'Neutral' rating, considering risk/reward to be balanced.

Core views

Financial Performance: March quarter revenue was $808 million, below UBS forecast of $832 million (company guidance $780-$830 million), primarily driven by strong 200G EML demand and sequential increase in OCS shipments, though investors had previously expected around $850 million. Non-GAAP gross margin reached 47.9%, higher than UBS forecast of 45.3% and VA consensus of 45.0%; Diluted EPS was $2.37, slightly above UBS forecast of $2.33 (company guidance $2.15-$2.35), consistent with investor expectations exceeding $2.40. Operating expenses were $126 million, below UBS forecast of $127.5 million, operating profit margin 32.2%, higher than UBS forecast of 30.0% and company guidance of 30%-31%. Business Segments: 'Components' revenue was $533 million, close to UBS forecast of $529 million, mainly driven by 100G/200G EML and DCI/scale-across laser demand; June quarter forecast for this segment is a 18% QoQ increase to $628 million, higher than UBS previous forecast of $594 million. 'Systems' revenue was $275 million, below UBS forecast of $303 million; although OCS shipments doubled, the base was small, and optical modules grew approx 40% QoQ hindered by component shortages. Forecast Revisions: Based on sustained strong AI infrastructure capital expenditures and data center construction visibility extending into 2027-2028, UBS raised FY26/FY27/FY28 Diluted EPS forecasts from $7.94/$12.06/$14.16 to $8.37/$17.61/$27.76, with FY28 EPS representing a 96% increase; gross margin forecasts also improved due to better high-margin product mix. Valuation and Market Expectations: Due to strong growth expectations for OCS, CPO, and EML, Lumentum's stock price rose approx 114% in the past three months. UBS calculates the current stock price corresponds to approx 29x CY28 EPS (UBS forecast $32.78), close to or even higher than the target price. UBS switched target price calculation basis to 50/50 weighted CY27/CY28 EPS, maintained target P/E of 35x, corresponding to CY27/CY28 blended EPS of approx $27.39, new target price $960. The report points out that some investor expectations for CY28 EPS are as high as $40-50, significantly higher than UBS' approx $32.78-33.67 and market consensus of approx $23.16, indicating current valuation already fully reflects optimistic expectations.

Analysis framework

UBS analysis follows the framework of 'Performance → Channel Research → Supply & Demand → Valuation'. First, compare company actual performance with its own forecasts, market consensus, and investor expectations to identify gaps ('revenue slightly missed, but earnings beat'). Second, combined with channel research post-OFC conference, judge that AI data center construction capex visibility extends to 2027-2028, thereby updating revenue assumptions for EML, OCS, CPO, and optical modules. Third, pass income changes to the income statement; increased proportion of high-margin Components drives GM and operating leverage improvement, resulting in new EPS forecasts. Finally, use target P/E method, multiplying CY27/CY28 blended EPS by 35x to determine target price, and compare with current stock price, historical valuation ranges, peers, and S&P 500 relative valuations to conclude neutral risk/reward.

Methodology notes

• Valuation MethodPE/PEG valuation

  Target PE Valuation Method

  The report derives the $960 target price by multiplying the target PE ratio of 35x by CY27/CY28 blended EPS ($27.39). The PE method discounts future earnings to the current stock price; the multiple reflects the market's pricing of growth sustainability and certainty.

• Industry/Industrial Analysis FrameworkSupply and Demand Framework

  Breakdown of Optical Communication Demand and Supply Chain Constraints from Both Sides

  UBS splits Lumentum's business into Components and Systems, evaluating the impact of demand brought by AI data centers (EML, OCS, CPO, optical modules) and supply chain bottlenecks (component shortage, capacity ramp-up) on revenue recognition.

• Event Gaming and Behavioral FinanceExpectation Gap/Expectation Management

  Deviation between Market Expectations and Earnings Forecasts

  The report repeatedly compares UBS forecasts, market consensus, and more optimistic investor expectations (e.g., CY28 EPS $40-50), judging that the stock price has priced in or even discounted the optimistic scenario early, which is the core basis for maintaining neutrality.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Lumentum Holdings Inc (LITE.O)

  Primary beneficiary of AI data center optical device/photonics equipment demand; 100/200G EML, OCS, CPO, and optical module demand strong

  Strengths

  Possesses technology and capacity advantages in high-speed optical communication components (EML, OCS, CPO); Improved profit margins driven by increased proportion of high-margin Components products; Demand linked to Nvidia and hyperscaler AI capital expenditures

  Weaknesses

  Systems/OCS and optical module businesses dragged down by supply chain constraints, revenue recognition missing expectations; Current stock price close to or even higher than target price, market expectations extremely high

  Risks

  Supply chain execution below expectations, component shortage, hyperscaler capex slowdown, overvaluation

Key data

• March Quarter Revenue$808MBelow UBS forecast $832M, company guidance $780-830M
• March Quarter Non-GAAP Gross Margin47.9%Higher than UBS forecast 45.3% and VA consensus 45.0%
• March Quarter Diluted EPS$2.37Above UBS forecast $2.33, company guidance $2.15-2.35
• June Quarter Components Revenue Forecast$628M18% QoQ increase, higher than UBS previous forecast $594M
• FY26/FY27/FY28 Diluted EPS Forecast (New)$8.37/$17.61/$27.76Significant raise compared to previous $7.94/$12.06/$14.16, FY28 up 96%
• 12-Month Target Price$960Based on 35x CY27/CY28 blended EPS $27.39, previously $455
• Current ValuationApprox 29x CY28 EPSStock price approx $984, corresponding to UBS CY28 EPS $32.78
• Stock Price Increase Over Past 3 MonthsApprox 114%Reflects optimistic expectations of the market for AI optical devices

Impact & implications

For Lumentum, demand for high-speed optical communication devices from AI data centers is the core driver of revenue and profit growth over the next two to three years. UBS believes that increasing penetration rates of EML, OCS, and CPO will continue to boost Components segment growth and improve overall gross margins. However, the current stock price has already priced in this high-growth expectation, and even some investor expectations for CY28 EPS ($40-50) are significantly higher than UBS and consensus levels; if supply chain bottlenecks (especially OCS and optical modules) persist, or hyperscaler capital expenditure growth slows, there is significant room for valuation correction. Therefore, the report maintains 'Neutral', considering short-term upside limited, with risk and opportunity relatively balanced.

Risks

• AI data center capital expenditure growth rate may slow, causing revenue to miss expectations.
• Supply chain execution remains uncertain; OCS and optical module component shortages may persist.
• Current stock price fully reflects optimistic expectations; valuation requires very high earnings realization standards.
• Market's CY28 earnings expectation ($40-50) significantly higher than UBS and consensus; if expectations fail, may trigger valuation correction.

What to watch

• Future quarterly Components revenue and 100/200G EML demand trends.
• Capacity ramp-up and delivery progress of OCS and CPO.
• Status of resolution of optical module supply chain bottlenecks.
• Hyperscaler AI capital expenditure and data center construction pace.
• Changes in the gap between market consensus earnings forecasts and company guidance.