JPMorgan Upgrades Laser Maker Expects 30% Rally

According to JPMorgan, investors who are able to see past the near-term challenges for Lumentum should find it easy to make gains.

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From neutral to overweight, Samik Chatterjee raised his price target by $6 to $60 on the stock, known to some extent for its autonomous driving technology. From where it ended Friday's session, Chatterjee's new price target suggests the stock may rise 32.6%.

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According to him in a note to clients on Monday, the current valuation of the company is pricing in more headwinds than is realistic, and even when conservatively considering additional downside from continued share losses in 3D sensing and inventory rationalization of Telecom and Datacom customers, he believes the current valuation is overpriced.

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During the pre-market trading session, the stock was up 2.6%. However, the stock has fallen 13.3% since the beginning of the year.

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In terms of the company's demand, he observed that the company is in the midst of a "perfect storm". There have been some impacts on the data-communications business from the broader challenges that cloud providers are facing, while the commercial lasers business has felt a significant impact from macro headwinds that are cooling industrial activity more broadly. He commented that Lumentum has encountered challenges when it comes to equipment vendors who have purchased equipment from the company. He also noted the company's three-dimensional sensing business could see further declines going forward.

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Although he stated that the potential loss of three-dimensional sensing can be offset by lower revenue estimates, he did not elaborate. As a result of the company's enhanced balance sheet flexibility, Chatterjee said the company's earnings outlook has improved, in line with his expectations.

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In particular, he increased his earnings estimate from $5.50 to $5.90 for the year 2025. As demand trends stabilize in 2025, earnings should normalize as the company reaps the benefits of $500 million worth of planned share repurchases within the next two years.

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In the meantime, he said that earnings per share estimates for 2023 and 2024 may be revised downward. Its historical multiple of 13x has been lower than 10x, which he noted will occur in both years.

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In terms of demand, the company faces a "perfect storm." There are challenges facing cloud companies in the data-communications business, while there are macro headwinds cooling industrial activity in the commercial lasers business. Additionally, Lumentum has faced difficulties with equipment vendors and noted that its three-dimensional sensing business could suffer further declines.

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The potential loss in three-dimensional sensing has been accounted for by lower revenue estimates, he said. As the balance sheet has become more flexible, Chatterjee said his earnings expectations have improved.

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In particular, he increased his earnings estimate from $5.50 to $5.90 for the year 2025. As demand trends stabilize in 2025, earnings should normalize as the company reaps the benefits of $500 million worth of planned share repurchases within the next two years.

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In the meantime, he said that earnings per share estimates for 2023 and 2024 may be revised downward. Its historical multiple of 13x has been lower than 10x, which he noted will occur in both years.

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He said that makes an attractive entry point, since "the current valuation assumes more risks than is realistic or assumes cyclical rather than structural lower demand in Telecom and Datacom."

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