Lumentum Stock Is Overvalued at 11.4X P/S: Should You Still Buy It?

Image Source: Zacks Investment Research

Is Lumentum worth buying at current prices? Let us dig deep to find out.

LITE Shares Ride on AI Prospects

Year to date (YTD), Lumentum shares have outperformed the broader sector, as well as Coherent, Cisco Systems and Broadcom. LITE returned a whopping 162.9% YTD while the broader sector, Coherent, Cisco Systems and Broadcom have returned 18.9%, 90.3%, 46.6% and 13.4%, respectively.

LITE Stock’s Price Performance

Image Source: Zacks Investment Research

Lumentum is benefiting from the rapid expansion of AI and cloud infrastructure, which is increasing bandwidth requirements within and between data centers and accelerating the shift from electrical to optical connectivity. The company said that AI compute workloads are increasing in speed and bandwidth, prompting data center architects to rely increasingly on optical links. The company believes that this transition is still in its early stages and is expanding Lumentum’s total addressable market (TAM) across scale-out, scale-across and, increasingly, scale-up connectivity.

The transition from 800G to 1.6T transceivers is expected to support strong systems growth. Lumentum has begun shipping 1.6T cloud transceivers, while hyperscale customers are rapidly transitioning their custom AI clusters from 800G to 1.6T. The company expects 1.6T adoption to accelerate from the first quarter of fiscal 2027 and remain strong through calendar 2027. Lumentum believes that it has been the first to market in several instances, ahead of larger competitors, giving it an opportunity to capture share. Higher-ASP 1.6T products, along with better yields and capacity utilization, are also improving transceiver profitability.

Lumentum’s OCS ramp is supported by strengthening demand under a multi-year, multi-billion-dollar purchase agreement. Systems revenues in the fourth quarter of fiscal 2026 increased 30% sequentially and 123% year over year, aided by record cloud transceiver shipments and the OCS ramp. LITE expects its fiscal first quarter to register more than $100 million in OCS revenues and said that demand visibility for 2027 remains very strong. The company is consequently expanding both internal manufacturing and contract-manufacturer capacity, and broadening the OCS roadmap to additional port counts and specialized configurations.

Co-packaged optics (CPO), near-packaged optics (NPO) and external light source modules are expected to move optics deeper into AI systems and potentially replace copper connections in scale-up networks. Lumentum has seen stronger demand signals from its lead CPO customers, secured an initial ELS module order and is participating in multiple NPO engagements. LITE identifies OCS, 1.6T cloud modules, ultra-high-power CPO lasers, ELS modules and NPO engagements as emerging growth drivers that are increasing the company’s optical TAM.

The growth outlook is increasingly translating into profitability for Lumentum. In the fourth quarter of fiscal 2026, the non-GAAP gross margin was 50.4%, up 1,260 basis points (bps) year over year, while the non-GAAP operating margin was 36.6%, up 2,160 bps. LITE attributed the improvement to manufacturing utilization, favorable product mix and selective price increases. Lumentum guided fiscal first-quarter revenues of $1.225-$1.275 billion and a non-GAAP operating margin of 39.5-40.5%, suggesting further operating leverage as AI-related revenue scales.

LITE’s 2027 Earnings Estimate Revision Shows Rising Trend

The Zacks Consensus Estimate for fiscal 2027 earnings is pegged at $18.71 per share, up 5.1% over the past 60 days, suggesting 115.8% growth from the fiscal 2026 reported figure.

The consensus mark for first-quarter fiscal 2026 earnings is pegged at $3.56 per share, unchanged over the past 60 days and indicating 223.64% growth from the figure reported in the year-ago quarter.

Conclusion

Lumentum’s premium valuation appears well-supported by its accelerating exposure to AI-driven optical networking demand, expanding addressable market and improving profitability. Strong momentum in 1.6T transceivers, OCS, CPO, NPO and external light source modules should help the company capitalize on hyperscalers’ rising investments in next-generation data center infrastructure.

At the same time, improving product mix, higher manufacturing utilization and operating leverage are translating robust revenue growth into sharply higher margins and earnings. The upward revision in the Zacks Earnings Estimates for fiscal 2027 further underscores improving confidence in Lumentum’s growth trajectory. Investors willing to accept the premium valuation may find Lumentum worth considering as a play on the continued expansion of AI and cloud infrastructure.

Lumentum currently has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Radical New Technology Could Hand Investors Huge Gains

Quantum Computing is the next technological revolution, and it could be even more advanced than AI.

While some believed the technology was years away, it is already present and moving fast. Large hyperscalers, such as Microsoft, Google, Amazon, Oracle, and even Meta and Tesla, are scrambling to integrate quantum computing into their infrastructure.

Senior Stock Strategist Kevin Cook reveals 7 carefully selected stocks poised to dominate the quantum computing landscape in his report, Beyond AI: The Quantum Leap in Computing Power.

Kevin was among the early experts who recognized NVIDIA's enormous potential back in 2016. Now, he has keyed in on what could be "the next big thing" in quantum computing supremacy. Today, you have a rare chance to position your portfolio at the forefront of this opportunity.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

This article originally published on Zacks Investment Research (zacks.com).

Zacks Investment Research