Surpassing AI Demand Expectations, Lumentum Kicks off Price Increase and Expansion Mode

JPMorgan recently hosted an investor meeting with the management of optical communications giant Lumentum, where it was revealed that the demand for AI computing power has grown much faster than expected. Chief Executive Officer Michael Hurlston pointed out that the current market opportunities for expansion across scales are even grander than anticipated a few weeks ago, and the company is on the cusp of a demand explosion.

In the field of core components, Lumentum has shown a very strong bargaining power with a market share of up to 70% to 80% in pump lasers and ITLA components. The management plans to increase production capacity to three to four times the current revenue level within the next four to six quarters, and is expected to drive a double-digit price adjustment to optimize the profit structure.

Regarding the highly market-concerned optical circuit switch OCS business, the company reiterated its confidence in achieving the target of a $400 million order backlog in the first half of fiscal year 2027. The manufacturing bottlenecks such as component procurement and testing time that previously hindered production capacity have been largely resolved, and the company is consolidating its competitive advantage in the AI training and inference market through software differentiation and a three-pronged product roadmap.

In the field of optical transceivers, Lumentum has secured its position as the exclusive supplier for the main customer's 1.6T product line and has deeply participated in cutting-edge network architecture innovations including Google Virgo. Although some customers' vertical integration has made minor adjustments to the laser business, it is expected to have a very limited impact on total transactions, and the company still insists on keeping transceiver production in-house to meet customers' supply chain security needs.

The path to profit margin improvement is the financial core that investors are currently focused on. The management frankly stated that the current transceiver business has a gross margin of about 20%, which is still significantly lower than the 40% industry average. The company has established a clear plan to increase the gross margin to above 30% by improving the yield rate and optimizing plant utilization, and believes that a more favorable product mix will become the key driver for future profit growth.

Looking ahead, the market should focus on Lumentum's progress in promoting the mass production of 6-inch wafers at its Greensboro factory, and whether the company will alleviate the increasing capacity pressure by building new plants. JPMorgan currently maintains its overweight rating on the stock and gives a target price of $1,130, believing that its technological moat will support the company's continued benefits in the next generation computing architecture.