One Way To Play iPhone Momentum: Lumentum

Among the companies thriving under Apple Inc. AAPL's shade is Lumentum Holdings Inc LITE, which makes 3D sensors among other things.

The company is a manufacturer of optical and photonic products for the data communications, telecom, consumer and industrial markets as well as commercial lasers.

Apple indicated that 3D Sensing has been designed into its new iPhone X, both the low-power and high-power VCSELs added on the screen side of the iPhone.

Following Apple unveiling its newest iPhone model design with 3D Sensing, Piper Jaffray reiterated its Overweight rating and $68 price target on the shares of Lumentum. Meanwhile, Stifel maintains its Buy rating and $73 price target.

A 3D Sensing Market Play

Piper Jaffray analyst Troy Jensen continues to view Lumentum as the best way to play the 3D Sensing market. The analyst believes the company's time-to-market advantage with Apple will result in ongoing design wins with other smartphone manufacturers and other companies seeking to implement 3D Sensing in various applications.

Meanwhile, Piper Jaffray noted that the low-power VCSEL is being used for facial recognition, with Apple calling it Face ID, to unlock the phone, and the high-end VCSEL is likely to be used for some of the other applications Apple exhibited at the product launch.

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Based on conversations with some of the industry contacts, the firm believes Apple is preparing VCSEL suppliers for two to three times volumes of the iPhone X launch. The firm thinks this volume increase is due to Apple planning to use this technology in more than one product for next year's launch.

The firm is of the view that Lumentum will continue to maintain the 100 percent share it has for both VCSELs until Finisar Corporation FNSR gets requalified for the high-power VCSEL, which is expected in early October. The firm estimates the 3D Sensing dollar content of the iPhone X to be in the $4–$4.5 range.

Since reporting $200 million in 3D Sensing bookings during the June quarter call, the firm said the company continued to receive volume production orders. The firm also feels the data points for its core optical business will improve.

Additionally, the firm thinks inventory levels in China will see a modest recovery in the fourth quarter and into 2018. Some of the recent China tenders will help boost growth in China in 2018, the firm added.

Well Positioned To Grow Through FY18

Meanwhile, Stifel analysts Patrick Newton, James Gruetzmacher and John-Michael McGrath believe Lumentum is well positioned to grow through fiscal year 2018, thanks to the 100G optical communications cycle, data center share gains, growth potential around 3D Sensing, with aggressive adoption expected in 2018, and growth in fiber laser business following the current challenging period.

Stifel also expects margin tailwinds, driven by mix, rebounding laser fundamentals and fixed cost absorption.

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Image Credit: Apple