Lumentum's (LITE +1.26%) stock plunged 33% on Nov. 12 after the fiber optic component maker announced that one of its top industrial and consumer customers -- widely presumed to be Apple (AAPL +2.08%) -- requested a material reduction in shipments of laser diodes for 3D sensing technologies.
The announcement also caused shares of Apple, which cancelled a production boost for the lower-end iPhone XR in early November, to slide 5%. Shares of Oclaro (OCLR +0.00%), which Lumentum is in the process of acquiring, dropped 12%.
Image source: Getty Images.
Lumentum slashed its guidance for the second quarter to reflect the change, which was abrupt since the company had just reported its first quarter earnings on Nov. 1. But did investors overreact by knocking the stock down to a fresh 52-week low?
How bad was the guidance?
Before we review Lumentum's updated guidance, we should examine its revenue and earnings growth over the past four quarters.
|
Q2 2018 |
Q3 2018 |
Q4 2018 |
Q1 2019 | |
|---|---|---|---|---|
|
Revenue |
52.7% |
16.8% |
35.2% |
45.6% |
|
EPS |
288.4% |
59.2% |
143.6% |
204.7% |
YOY growth, non-GAAP. Source: Lumentum quarterly reports.
Lumentum's growth accelerated over the past two quarters on robust demand for telecom and fiber laser products, rebounding demand in China, and the expansion of 3D sensing technologies across multiple customers. It also benefited from easy comparisons to the previous year, which saw cyclically soft demand for fiber optic components.
Last quarter, 88% of Lumentum's revenue came from its core optical communications products, and the remaining 12% came from its laser components. Its optical revenues rose 49% annually, and its laser revenues grew 25%.
Most of the laser unit's growth came from the industrial and consumer segment, which posted 154% annual sales growth during the quarter. That growth was tempered by the slower growth of the much larger commercial laser segment.
Lumentum investors likely hoped that stronger demand for 3D sensing laser diodes would boost the unit's overall growth. Unfortunately, the updated guidance indicates that those plans won't pan out:
|
Q2 2019 |
Original guidance |
Revised guidance |
|---|---|---|
|
Revenue |
0% to 6% |
(12%) to (17%) |
|
EPS |
(4%) to 5% |
(20%) to (31%) |
YOY growth, non-GAAP. Source: Lumentum press release.
Lumentum originally expected its non-GAAP operating margin to hit 28%-30% during the second quarter, up from 23.9% in the first quarter. However, it now expects that figure to stay roughly flat sequentially at 23% to 25%.
Are investors overreacting?
Investors likely abandoned Lumentum for three simple reasons. First, the loss of a major customer will cause analysts to lower their guidance across the board. Second, fiber stocks are highly cyclical, and investors didn't want to get caught in a downturn -- especially in a weak market. Lastly, nervous investors were already looking for reasons to sell amid the broader sell-off of tech stocks.
However, Lumentum's sell-off also reduced its forward P/E to about 7. Granted, that multiple will likely rise as analysts cut their estimates, but that ratio could remain in the single digits even if Lumentum loses a fifth of its earnings.
Investors should also remember that Lumentum has other irons in the fire. Lumentum expects its acquisition of Oclaro to become accretive to its non-GAAP earnings "immediately" after closing, generate over $60 million in run-rate synergies within 12 to 24 months, and broaden its R&D capabilities and product portfolio.
Image source: Getty Images.
It also expects more Android OEMs to add 3D sensing features to their phones, driverless cars to lift demand for its 3D sensing and LIDAR applications, and more industries to adopt 3D sensing technologies. It also expects demand for ROADMs (reconfigurable optical add-drop multiplexers) to rise across multiple industries. During last quarter's conference call, CEO Alan Lowe stated that Lumentum's "product development pipeline is full."
Should you buy Lumentum at its 52-week low?
Lumentum's announcement cast a dark cloud over its future, Apple's iPhone sales, and other suppliers' earnings. I think Lumentum might bounce back from these levels, since the sell-off seemed too severe, but I wouldn't buy it right now without any near-term catalysts to bring back investors.
