Changed Focus: Why This Lumentum, NeoPhotonics Analyst Is Swapping Optical Stocks

It's time to step to the sidelines for the optical stock Lumentum Holdings Inc. LITE and instead add to NeoPhotonics Corporation NPTN holdings, according to a Rosenblatt Securities analyst. 

The Optical Stocks Analyst: Ryan Koontz upgraded NeoPhotonics shares from Neutral to Buy and increased the price target from $12 to $16.

At the same time, the analyst downgraded shares of Lumentum from Buy to Neutral and trimmed the price target from $105 to $97.

NeoPhotonics On Track To Break Even: NeoPhotonics appears uniquely well-positioned to benefit from the upcoming transition from embedded coherent optics to pluggables, Koontz said in the upgrade note.

Strong growth in non-Huawei and 400G+ revenues will likely help the company return to breakeven in the fourth quarter of 2021, the analyst said. 

"We are confident NPTN should benefit from optical component sales to many ZR module manufacturers and see upside opportunity for NPTN to secure secondary share of ZR modules to hyperscale customers in 2H21," he said. 
Competitive threats to the company's position are limited, Koontz said.

With the company's focus now on coherent 400G+ and 400G-ZR, it could benefit from the opportunity to lead these growth markets, the analyst said. 

"Despite high stock volatility throughout 1Q21, we see a clear path to radically improved results entering CY22."

Related Link: Apple Cuts Orders For iPhone 12 Mini By 70% Owing To Lack Of Demand: Report

Organic Opportunities For Lumentum Waning: Speculation of Apple Inc.'s AAPL iPhone production cuts combined with recent share loss at Apple increases concern that Lumentum may be challenged to exceed near-term consensus revenue targets, Koontz said in the downgrade note. 

Datacom demand will continue to remain strong, but telecom will likely see seasonal softness in the March quarter, the analyst said. 

"Following a two-year stint of excellent execution in improving gross and operating margins with minimal stock performance to show for it (inline with S&P), we see few near- to medium- term catalysts to get excited about," he said. 

Further, the company's escalating bidding war for Coherent, Inc. COHR suggests few game-changing organic opportunities, according to Rosenblatt. 

LITE, NPTN Price Action: At last check, NeoPhotonics shares

were trading down 0.53% at $13.06, while while Lumentum was slipping 3.48% to $85.34.

Related Link: A Look Into Lumentum's Debt