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Should Investors Buy Lumentum After Monday's Plunge? The Street Debates

November 13, 2018 12:52 pm
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Shares of Lumentum Holdings Inc (NASDAQ:LITE) plummeted more than 30 percent Monday after revising its guidance lower after an un-named industrial and consumer customer, most likely Apple Inc. (NASDAQ:AAPL), lowered its orders. Here is a summary of how some of the Street's top analysts reacted to the report.

The Analysts

  • BlueFin Research Partners' John Donovan and Steve Mullane.
  • MKM Partners' Michael Genovese maintains a Buy rating on Lumentum with a price target lowered from $78 to $60.
  • Raymond James' Chris Caso.
  • Tigress Financial Partners' Ivan Feinseth.
  • Rosenblatt Securities' Jun Zhang maintains Lumentum's stock at Buy, unchanged $80 price target.

At time of publication, shares were trading around $39.36.

BlueFin: 'Shocking' Announcement

Lumentum's guidance cut is "frankly shocking" as BlueFin's first-hand checks and conversations point to only "some minor reduction" in iPhone builds in the fourth quarter, Donovan and Mullane said in a note. It's likely "a combination of factors" contributed to Lumentum's revised outlook, including a potential new competitive in 2019 born out of the recent merger announcement of Finisar Corporation (NASDAQ:FNSR) and II-VI, Inc. (NASDAQ:IIVI) and inventory management.

Lumentum remains in the "driver's seat" for more powerful and expensive VCSELs in Apple's ecosystem through 2019 and 2020 as Finisar and IIVI's full-scale qualification has yet to take place.

MKM Partners: Over Sold Reaction

Lumentum's 30-percent decline is an overreaction as the company remains a dominant technology supplier and market share leader in 3D VCSELs, Genovese said in a note. The company should continue to hold an undisputed market share in supplying Apple as the company's guidance revision is "100 percent explained" by inventory levels and "nothing to do" with potential market share changes.

Following Monday's plunge, Lumentum's stock is trading at just eight times estimated 2020 EPS which is "too inexpensive" and the firm's $60 price target is based on a 12 times multiple.

Related Link: How To Trade The Apple Supply Chain, According To Bernstein

Raymond James: Consistent With Checks

Preliminary first-hand checks relating to iPhone order cuts of up to 30 percent for the Xr model and 5 percent to Xs and Xs Max build plans are consistent with Lumentum's guidance, Caso said in a note. Apple's revision was likely decided over the past few days and could result tin an "end of life surprise" in which the iPhone maker will decide to complete end production of an iPhone model. This potential is not reflected in current supplier estimates.

Tigress: Look Towards Alibaba

Investors looking for proof that iPhone demand remains strong should consider the company's strong performance during Alibaba Group Holding Ltd (NYSE:BABA)'s Singles Day event where it was the No. 1 selling smartphone, Feinseth said in his daily newsletter. Even if Apple is lowering its iPhone production, the company can still make more money by selling few phones from higher average selling prices.

Lumentum's guidance revision amounts to a rumor of revision at Apple and every time "there has been a rumor or research report highlighting weakness in Apple's supply chain it has usually been wrong," the analyst wrote.

Rosenblatt: No New Risks Ahead

Rosenblatt's prior checks and research estimates Apple lowered its iPhone XR production by nine million units and six million units in the calendar fourth quarter 2018 and first quarter 2019, respectively, Zhang said in a note. However, the company also lifted its production for the iPhone Max and iPhone X by three million units.

As such, Lumentum's guidance revision is likely a reflection of the company taking a conservative approach if Apple cuts orders again. Apple doesn't want to hold inventory of first generation VCSEL chipsets ahead of a possible shift to second generation VCSELs which is smaller and more powerful.

Zhang said it's likely Lumentum's 3D sensing revenues to Apple will still grow on a year-over-year basis in the first of half 2019.

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