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Better Buy: Lumentum vs. Intel Corporation

By Leo Sun - Mar 31, 2020 at 8:50AM

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Which tech company is better poised to weather the COVID-19 crisis?

Intel (INTC 1.46%) and Lumentum (LITE 1.91%) provide crucial electronic components for multiple industries. Intel is the world's top manufacturer of CPUs for PCs and data centers, and Lumentum manufactures optical products for carriers and laser components for various markets.

Both stocks dipped just over 10% since the beginning of the year, but easily outpaced the S&P 500's 20% decline during the same period. That relative strength might seem surprising, since the novel coronavirus (COVID-19) pandemic is disrupting supply chains and delaying orders. Let's examine both stocks to see if they're actually resistant to the coronavirus crisis, and if one is a better buy than the other.

Glowing blue lines on a circuit board.

Image source: Getty Images.

How do Intel and Lumentum make money?

Intel's PC and data center chips accounted for 52% and 33% of its revenue, respectively, last year. The rest came from memory chips (6%), Internet of Things chips (5%), programmable chips (3%), and its automotive unit Mobileye (1%).

Chips being manufactured on a wafer.

Image source: Getty Images.

By region, Intel generated 28% of its revenue from China, 22% from Singapore, 22% from the United States, 14% from Taiwan, and nearly 15% from other countries. Intel's main rival is AMD, which is gaining ground in the PC and data center markets as Intel struggles to resolve its CPU shortage and sluggish ramp-up of next-gen chips.

Lumentum generated 88% of its revenue from optical communications products last year. The remaining 12% came from sales of laser components. Its core optical communications business produces components for carriers and diodes for 3D-sensing cameras. By region, Lumentum generated 25% of its revenue in Hong Kong, 14% from Mexico, 10% from South Korea, 11% from Japan, and the rest from other markets.

Lumentum's three largest customers are Apple (AAPL 2.14%), Huawei, and Ciena, which accounted for 21%, 15.2%, and 13.7% of its revenue, respectively, last year. That customer concentration is risky, since the coronavirus crisis is disrupting Apple's supply chain as Huawei gradually reduces its dependence on American technologies.

How fast are Intel and Lumentum growing?

Intel's revenue growth decelerated significantly in 2019 as its CPU shortage, competition from AMD, and sluggish sales to data centers all took their toll. Lumentum's growth accelerated as carriers upgraded their networks, Apple sold more 3D-sensing iPhones, and it acquired its smaller rival Oclaro.

Revenue growth (YOY)

2016

2017

2018

2019

Intel

7%

6%

13%

2%

Lumentum

8%

11%

25%

25%

Source: Company annual reports.

In late January, Intel estimated that its revenue would rise 2% in fiscal 2020 as it resolved its CPU shortage issues, launched new chips, and capitalized on the surging demands of the data center market. It expected its non-GAAP EPS to rise 3%, and its stock trades at about 10 times that forecast.

Intel hasn't reduced that guidance to account for the coronavirus crisis yet, but it recently suspended its plans to repurchase $20 billion in shares to preserve capital and protect its dividend.

Lumentum, which reported its second-quarter earnings in early February, expects its third-quarter revenue to decline 2%-8%, but for its non-GAAP earnings to improve 10%-29%. It didn't offer any full-year guidance, but analysts expect its revenue and earnings to rise 11% and 22%, respectively -- which are impressive growth rates for a stock that trades at 11 times forward earnings.

Lumentum also hasn't reduced its guidance to account for the coronavirus outbreak yet, but its heavy exposure to Apple and Huawei suggests that it could do so in the near future.

Which stock is the better buy?

Intel is much larger than Lumentum, generates stronger cash flows, and owns a better-diversified business with a wider moat. Intel pays a forward dividend yield of 2.4%, but Lumentum has never paid a dividend. Those qualities all make Intel a stronger pick than Lumentum at current prices, but investors should wait for Intel to provide clearer guidance for the rest of the year before pulling the trigger.

 

Leo Sun owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool recommends Intel and Lumentum Holdings. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Intel Corporation Stock Quote
Intel Corporation
INTC
$36.11 (1.46%) $0.52
Lumentum Holdings Inc. Stock Quote
Lumentum Holdings Inc.
LITE
$94.27 (1.91%) $1.77
Apple Inc. Stock Quote
Apple Inc.
AAPL
$172.10 (2.14%) $3.61
Ciena Corporation Stock Quote
Ciena Corporation
CIEN
$54.70 (3.42%) $1.81

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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