Rosenblatt Gives Lumentum's Business Shift A Vote Of Confidence

While channel checks suggest a strong demand environment, the move by Lumentum Holdings Inc (NASDAQ: LITE) to become an optical component supplier could result in increased profitability, according to Rosenblatt Securities. 

The Analyst

Analyst Jun Zhang maintains a Buy rating on Lumentum with an unchanged $80 price target.

The Thesis

Channel checks with system suppliers and carriers in China indicate strong demand for reconfigurable optical add-drop multiplexer — ROADM — solutions in the country, Zhang said in the report.

Faced with rising labor costs, China Mobile and China Telecom are looking to increase ROADM adoption to build new metro networks, the analyst said. Lumentum’s China ROADM business could deliver healthy growth in 2019, and the coming years could bring sustained growth in ROADM deployment in China, he said. 

Chinese wavelength selective switch, or WSS, demand is growing fast, Zhang said. Although Huawei has inventory and could serve WSS demand through 2019, the Chinese telecom manufacturer’s inventory level “won’t be a big issue” as demand in China continues to grow in 2020, the analyst said. 

Pump laser demand is also strong, and Lumentum is facing supply shortages, according to Rosenblatt. The company’s capacity could increase after the move to its Thailand factory in the second half of this year, the sell-side firm said. 

Lumentum’s decision to sell its high-cost Japan manufacturing facility will result in significant operating cost savings, Zhang said. 

Price Action

Lumentum shares were down 0.3 percent at $46.76 at the time of publication Thursday. 

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