Needham Calls Lumentum Its 'Single Best Idea' For 2018 In Optical, Networking

Needham offered its take on two companies in the optical and networking space, naming Lumentum Holdings Inc LITE as its single best idea for calendar 2018, while it downgraded shares of Oclaro Inc OCLR.

The Analyst

Needham analyst Alex Henderson maintained a Strong Buy rating and $80 price target for Lumentum. The analyst downgraded shares of Oclaro from Buy to Hold.

Needham's Lumentum Thesis

Lumentum's dominant market share in its core ROADM business, where it boasts a 65-percent share, and the pump laser business, with a 50-percent share, differentiates the company from other optical names, Henderson said in a Monday note. (Seen Henderson's track record

The industrial laser segment presents a promising growth opportunity for Lumentum, the analyst said. The company is poised to sharply ramp 3-D sensing from $40 million in the September quarter to $150 million-plus in the December and January quarters, he said. 

"This mix of strong fundamentals on the optical side and the exceptional opportunity in 3-D make Strong Buy-rated LITE our Single Best Idea for CY18." 

Oclaro: Street Estimates Too High? 

For Oclaro, limited growth visibility is a cause for concern, making Needham cautious as 2017 progressed, Henderson said. The consensus estimates for calendar 2018 appear 3-5 percent too high on revenues and potentially even further from reality on EPS, he said. 

Although the fourth quarter of 2017 looked OK for Oclaro, Henderson said the March quarter consensus estimates appear to be too high. Additionally, the analyst said the Street estimate for Oclaro's calendar 2018 second-quarter ramp "looks too steep." 

The lack of growth could pressure margins as the year progresses, Henderson said. The analyst also noted that Oclaro does not expect growth in China to return until the second half of 2018.

"Looking at Oclaro's product suite, there doesn't appear to be any drivers to growth until late in CY18 and into CY19, " the analyst said.

The Price Action

Lumentum shares are up about 34 percent year-to-date, while Oclaro is down over 21 percent.

Related Links:

An Easy-To-Use Cheat Sheet For Apple Suppliers

With Lumentum Down 20% Over 2 Weeks, This Analyst Just Upgraded The Stock