Michael Wiggins De Oliveira
Deep Value Returns, Equity Investing without Options or Leverage
Lumentum's 49x free cash flow will look like an obvious bargain as very strong demand for its products turns into rapidly expanding free cash flow. The near-term fear that AI must pace the frontier is just a narrative. Unlike Applied Optoelectronics, which still burns meaningful cash and must raise capital from time to time, Lumentum is mature and no longer needs outside capital. The only question is how long the market takes to recognize it. x.com x.comÂ
Lumentum's free cash flow can expand far faster than investors expect, keeping the $1,400 target for late 2027. If revenue grows 70% toward $2B-plus per quarter and generates billions in annual free cash flow, paying roughly 38x today's FCF will look very cheap in hindsight. The stock has been painful to own, but the outlook is highly bullish. x.comÂ
Lumentum's valuation is supported by Nvidia's co-packaged optics scale-out progressing faster than expected. Spectrum-X CPO switches are in mass production on better component yields, with shipments forecast at 15k in 4Q26 rising to 100k in 2027. CPO and NPO are seen contributing 12% and 26% of Lumentum's revenue in 2027 and 2028. Scale-up optical engine estimates were revised to 6.5m and 42m for 2027 and 2028, with full NPO adoption for the cycle retained. x.comÂ
Applied Optoelectronics looks undervalued if its capacity converts into the modeled revenue ramp. From disclosed capacity, quarterly revenue could rise from $858M in Q1 2027 to $1.89B in Q4 and $2.14B in Q1 2028, against a $6.8B market cap. A $7.5B annualized exit rate in 2027 at 40% gross margins would make an unchanged valuation surprising. Lumentum's capacity agreements into 2030-31 suggest demand may last beyond 2027-28, but execution risk remains. x.comÂ
Lumentum requires paying up heavily for a company that is not yet making money. Revenue grew 109% year over year, but it trades at about 25 times annualized sales, and it is growing less than memory makers at ten times their valuation. @ZeekTyt cites Lumentum's CEO expecting to supply only about 30% of requested laser demand as CPO and NPO ramp in 2027, with balance around 2029-30. x.com x.comÂ
Scale-up co-packaged optics will likely end up larger than currently priced in, which supports Lumentum. AAOI has a high probability of outperforming Lumentum. x.comÂ
Lumentum still has substantial upside despite the selloff: its CEO says optical components are effectively sold out through nearly 2029, extending the earlier severe supply-shortfall outlook. The reported OpenAI revenue projections behind the selloff do not change that demand case. x.com x.comÂ
Lumentum is a great business, but at $954 its risk/reward is not attractive. Applying 30x to fiscal 2028 non-GAAP EPS of $40 gives a 2027 price target of $1,200, about 26% upside, or roughly 15% after adjusting for execution, financial, technology and supply risks. Reaching it needs on-time manufacturing ramps, sustained pricing power and cash flow without excessive dilution. Lost pricing power plus slipping OCS or laser ramps would break the thesis; a significant dip would offer a better entry. … Show more
Applied Optoelectronics should trade above $150, in part because Lumentum's CEO says its optical components are sold out through early 2029 and it cannot meet roughly 70% of demand for some products through 2027. That industry signal strengthens the case for AAOI's expanding 800G/1.6T offerings after completion of its $600M ATM, with shares around $110. x.comÂ
Lumentum's 109% year-on-year growth and sold-out capacity through 2029 make selling its AI optics exposure questionable. Bloomberg reported Marvell is in advanced talks to buy it; the appeal depends on the price, especially when holders of an $80 billion Lumentum would become holders of a $320 billion-plus Marvell growing 37%. x.comÂ
Lumentum looks only slightly attractive, and only after another 10% drop, at about 24.5 times its guided $40 FY28 EPS at $980. Its upside is almost entirely driven by optical circuit switch demand from lead customer Google, which also points to a great 2027-2028 for fellow Google OCS supplier Huber+Suhner. Total OCS demand now exceeds the 8 million units first cited. x.comÂ
Lumentum supplies optical components inside every AI data center, and that demand remains relentless. x.comÂ
