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Lumentum: Surging Demand Meets Supply Constraints

Jun. 07, 2020 2:28 PM ETLumentum Holdings Inc. (LITE)7 Comments


  • Demand for most of the company's products is booming due to secular tailwinds. However, supply constraints and uncertainty about mobile phone demand are short-term negatives.
  • Despite declining revenue as a result of these supply constraints, which will continue into Q4, financial performance was stellar, mostly on acquisition synergies.
  • Given the amount of cash the company produces even with some temporary headwinds, the shares are very reasonably priced.

We hold Lumentum (NASDAQ:LITE) in our SHU portfolio already for quite some time as we bought 200 shares at $45.70 at the end of 2017. We argued in our last article that while the company was booming, we saw little room for immediate upside and that's how it played out.

While revenues have been boosted by the acquisition of Oclaro, operationally things have improved considerably:

ChartData by YCharts

There have been operational wobbles as you can see, largely the result of a fall in Chinese demand and the (GAAP) acquisition cost.

However, the company is executing beautifully, and all its end markets (bar the industrial lasers) are booming. On the other hand, even without the economic impact of Covid-19, the company was already supply constraint, and these constraints have become much worse as a result of the pandemic.


There are quite a number of ways the pandemic has affected the company:

  • In Q3, the Shenzhen and Thailand facilities suffered from supply shortages.
  • In Malaysia, production was halted for several weeks since March 16.
  • The efficiencies of waver production facilities in the US, Japan and the UK were all impacted by social distancing.
  • The company hasn't laid off or furloughed employees.
  • While these restrictions are easing, Q4 guidance is nevertheless significantly reduced by 20% or $90M at midpoint, just over half of this is due to supply constraints and the rest due to reduced consumer (VCSELs) and industrial (laser) demand.

Basically, the company is supply constraint on most key product lines, which is unfortunate as demand is almost invariably booming. However, there are also positive takeaways:

  • The pandemic is accelerating the shift towards digital and virtual approaches (entertainment, healthcare, meeting, education, commerce, etc.) which require bandwidth.
  • The pandemic is putting financial strain on smaller, less financially healthy competitors, allowing Lumentum to
ChartData by YCharts

ChartData by YCharts

ChartData by YCharts

ChartData by YCharts

This article was written by

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Finding the next Roku while navigating the high-risk, high reward landscape

I'm a retired academic with three decades of experience in the financial markets.

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Finding the next Roku while navigating the high-risk, high reward landscape.

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Analyst’s Disclosure: I am/we are long LITE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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