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

Lumentum Holdings Inc LITE, a supplier of optical components for the telecom transport and switching markets, has seen its stock fall 20 percent over the past two weeks and some on Wall Street are now encouraging investors to buy the dip.

The Analyst

Northland Capital Markets' Tim Savageaux upgraded Lumentum's stock rating from Market Perform to Outperform with a price target boosted from $55 to $58.

The Thesis

The case against owning the semiconductor company's stock since May 2017 was two-fold, Savageaux said in a Monday note. (See the analyst's track record here.)

The negatives included the potential for price pressure from "dramatically increased" unit volumes and market share declines, he said. 

But the stock has since "grown into its 3DS multiple," with $150 million in 3DS revenue valued at that time at $1.6 billion versus a current value of $2.2 billion on 3DS revenue, which is estimated to be $500 million in fiscal 2018, Savageaux said. In fact, the two biggest supply partners, IQE and Win Semi, jointly account for the equivalent implied 3DS value to the company, according to Northland Capital. 

Another factor contributing to a prior bearish stance was the ongoing weakness in the company's communication business, Savageaux said. But the analyst now projects a $350 million increase in 3DS revenue for fiscal 2018, which more than offsets the estimated $245-million decrease in comm revenue.

"This leaves an implied value for the comm unit, as well as a resurgent industrial laser unit likely worth over $350M by itself, of about $1B," the analyst said. 

Price Action

Shares of Lumentum were trading higher by nearly 6.65 percent at $52.90 at the time of publication. 

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