Chip and AI supply chain stocks have captured investors’ attention this year as demand for data center gear and networking kits rises with the AI boom. Not every supplier will benefit equally, but when a major platform player hints at a major strategic deal, traders listen.
This is precisely why Lumentum (LITE) looks interesting right now. The optical networking giant got a boost after Nvidia ( NVDA ) unveiled a slew of partnerships and investment commitments. Nvidia’s nearly $2 billion in support serves as a visual demand signal for Lumentum lasers and photonics components, which power high-speed links in AI servers and hyperscale networks.
For investors looking to play on AI infrastructure beyond the usual chip names, Lumentum offers a near-term revenue catalyst and a direct path to driving the optics tailwind with a powerful strategic partner in Nvidia.
Lumentum Holdings is a Silicon Valley designer and manufacturer of optical and photonic products that enable optical networking and laser applications worldwide. It serves the telecommunications and cloud data center markets, the “cloud and networking” segment with transistors, modulators and switches, and provides solid state and fiber lasers for industrial use. In short, Lumentum makes many lasers and modules that transmit data through a fiber network.
Recently, Lumentum secured a seven-year supply contract for key indium phosphide wafers, insulating it from Chinese export restrictions. Management also disclosed that the optical-circuit-switch/co-packaged-optics backlog exceeded $400 million. There are no material barriers; If anything, Lumentum is increasing capacity and closing components to meet demand. Overall, these updates strengthen Bell’s case that Lumentum can keep pace with the AI-optics boom.
LITE stock has been on a tear lately. It has nearly doubled year-to-date (YTD) and is up 940% year-over-year, beating the broader market. The rally follows a series of bullish and upbeat quarters and growth in AI/data center demand. Lumentum’s backlog of optical switch and co-packaged optic orders is now huge. Traders also liked Nvidia’s $2 billion deal, betting that Lumentum will continue its hyperscale growth.
However, this rapid rally has brought the company’s value to another level. LITE’s forward price-to-earnings (P/E) ratio is in the triple digits, and EV/EBITDA is in the order of 30x, well above telecom equipment industry norms. In other words, stocks are richly priced as long as future growth continues. Bells argues that the sky-high multiples are justified by a generational ramp-up in demand for AI optics, but by every metric, Lumentum is at a premium compared to most hardware benchmarks.
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On March 2, Nvidia announced it would invest $2 billion in Lumentum and $2 billion in Coherent to secure high-performance laser components for AI data center chips. Lumentum stock immediately jumped about 5% on the news, underscoring sector-wide enthusiasm. The deal closes a multi-year purchase commitment and provides capital for U.S. manufacturing expansion. Investors hailed this as de-risking the Lumentum pipeline.
Nvidia’s support validates Lumentum’s technology and frees up cash for capacity scaling. Management points out that Lumentum’s optical backlog is already above $400 million, so the additional funding should help accelerate production. According to analysts, the partnership is seen as unequivocally positive, a strong catalyst for sales and profitability.
Lumentum delivered just one beat quarter, which topped analysts’ estimates on both the top and bottom lines. In the second fiscal year, revenues increased to $665.5 million, an increase of 65.5% year-on-year (YoY). Nor was it by a small pocket of power. Component revenue increased 68% to $443.7 million, while system revenue increased 60% to $221.8 million. Growth was broad-based and powerful.
Profits changed in a big way. Net income came to $78.2 million, or $0.89 per share, compared with a loss of $60.9 million a year ago. On an adjusted basis, earnings rose to $1.67 from just $0.42 last year. Gross margin expanded to around 42.5%, up from 32.3%, helping push operating margin to 25.2%. The company also exited the quarter with strong cash and investments of $1.155 billion.
CEO Michael Hurlston hailed it as “a standout quarter” with revenue and EPS well above target. “The bulk of that growth is still ahead of us,” he added, indicating management’s view that Lumentum is ahead of schedule in its AI-driven development.
Overall, LITE shows impressive growth metrics, with forward revenue growth at 50% and forward EPS growth at 141%. This exceptional growth reflects LITE’s strong growth and solid financial performance.
In the future, the pace may accelerate. For fiscal year 3, management expects revenue between $780 million and $830 million, with adjusted earnings per share of $2.15 to $2.35, better than prior expectations. Analysts now see fiscal 2026 revenue of around $2.6 billion, with revenue likely falling in the $5 to $6 range if demand for AI optics remains strong.
Wall Street is bullish on Lumentum, even though opinions differ on how much upside remains.
Morgan Stanley, which has the stock on an “equal weight” basis, just raised its 12-month target to $520. The firm attributes a significant increase in data center and AI-led optic spending to the primary cause, indicating that the demand picture has brightened.
BofA also raised its target to $520 and maintained “neutral.” Analysts say AI Optics is performing well, but they are weighing on optimism about the price position from the recent run.
The biggest optimist at Citi is Papa Silas. He raised his target to $560 and maintained a buy call, citing consensus figures that Lumentum’s AI development prospects continue to expand.
Other companies are even more aggressive. Barclays has set a target of $750, while Tsukohana and Needham each sit at $550. Overall, 20 analysts rated the consensus “moderate buy”. However, the stock is currently trading well above its average price target of $573 and is steadily moving towards a higher target of $900.
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As of the date of publication, Nauman Khan had no position (either directly or indirectly) in any of the matters mentioned in this article. All information and data in this article is for informational purposes only. This article was originally published on Barchart.com
