This optical and photonics maker beat analysts’ estimates by $0.29 last quarter and five analysts have recently raised their EPS forecasts for the company.
Lumentum Holdings Inc. (LITE)
From Insider Alert
Lumentum Holdings Inc. (LITE) manufactures and sells optical and photonic products in the Americas, the Asia-Pacific, Europe, the Middle East, and Africa.
Apple’s business accounts for 30% of Lumentum’s revenue. Lumentum supplies chips called VCSELs used in Apple’s TrueDepth camera, part of Tim Cook’s push into augmented reality. Lumentum’s other business is in optical components. It supplies parts used to transfer data over fiber optics.
At $11 billion, the size of the augmented reality market is relatively small, but by some estimates it could be worth trillions of dollars when it gains widespread adoption. VCSELs are used as part of Apple’s TrueDepth camera to precisely map out a person’s face. This enables the securing of Apple devices with facial recognition and also augmented reality. A silly augmented reality application that already enables it is Apple’s Animoji feature.
The market for VCSELs is projected for high growth. Apple introduced FaceID with the iPhone X. Now, it’s beginning to roll out FaceID to its other iPhone and iPad models. FaceID is included on the 2018 iPhone XS, XS Max, and XR models and the 2018 iPad Pro. The VCSEL market could grow multiples from here. There is the potential to include VCSELs on the front and back of phones, instead of just the front, and to sell to other smartphone makers.
Based on what’s in development at Lumentum, CEO Alan Lowe says this scenario is “not a matter of if, it’s a matter of when.”
Mr. Market is hyper-focused on Apple iPhone forecasts, yet Apple represents just 30% of Lumentum’s revenue. Even if earnings growth slows down dramatically, which looks unlikely given the potential for this market, Lumentum trades at only 10x trailing earnings.
In addition, the balance sheet is strong and unlevered: Lumentum has $0.60 backing every $1 of assets. And more than $734 million in cash and cash equivalents. A modest 15x earnings multiple on no growth would yield a ~50% return. But with the VCSEL market forecasted to grow multiples from here, based on new uses and customers, that is highly conservative.
Charles Mizrahi, Insider Alert, www.angelpub.com, 877-303-4529, December 2018