This Analyst's Bearish Stance On Lumentum No Longer Applies

Lumentum Holdings Inc LITE, a provider of optical and photonic products and key Apple Inc. AAPL supplier, will be closely watched by investors amid concerning reports that iPhone demand isn't as strong as expected.

The Analyst

Morgan Stanley's Meta Marshall upgraded Lumentum Holdings' stock from Underweight to Equal-Weight with a price target raised from $44 to $46.

The Thesis

Lumentum will no longer boast a 100 percent share of the Apple 3D sensing VCSEL opportunity as the technology is expected to be included in all new iPhone models and iPad Pros, Marshall said in a note. This isn't necessarily a negative for Lumentum, as the opportunity to supply Apple with the technology will "remain larger" than what the consensus estimate is assuming today.

Specifically, Lumentum's competitors will likely be able to fulfill only 100 to 150 million units in this cycle, which implies Lumentum will need to supply 125 to 150 million units to satisfy Apple's requirements, the analyst said. By comparison, estimates are calling for Lumentum to supply just 100 million units in fiscal 2018. As such, the earnings per share contribution from Apple alone in fiscal 2019 is likely to be $3 to $3.60 which is above consensus estimates and implies the stock established a near-term floor price.

Lumentum does face some difficulties in its remaining business, including a lack of rebound in China demand, the "fiercely" competitive landscape in the datacomm market, and expectations for gross margins to fall.

Bottom line, the later half of 2018 sets up "too well" for Lumentum but given the volatility in the space, there are risks to the company over the longer-term.

Price Action

Shares of Lumentum were down less than 1 percent Tuesday morning. The stock is down 8 percent overe the last year.

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