Lumentum (NASDAQ:LITE), which produces optical chips and industrial lasers, is one of Apple's (NASDAQ:AAPL) major suppliers. Its sales of 3D-sensing chips to Apple accounted for 26% of its revenue last year, while its other major customers include Huawei and Ciena.

Lumentum's fate is tightly tethered to Apple's, but its stock price only rose 8% over the past 12 months as Apple's stock price surged nearly 70%. Let's see why Lumentum failed to keep pace with its biggest customer, and whether or not it can become a more compelling investment this year.

Why did the bulls avoid Lumentum?

In fiscal 2020, which ended last June, 90% of Lumentum's revenue came from its optical communications (OpComms) business, which sells optical chips to service providers and data center customers, as well as 3D-sensing chips for mobile devices, 3D printers, and industrial machines.

Apple's iPhone 12 Pro.

Image source: Apple.

The remaining 10% came from its industrial laser business, which sells high-end lasers for manufacturing and other purposes.

Lumentum's OpComms business remained stable before and during the pandemic, as Apple and other customers continued to order optical and 3D-sensing chips. But its industrial laser unit had already been struggling with soft demand for its fiber lasers prior to the pandemic, and the crisis exacerbated that pain as its industrial customers postponed their orders.

Lumentum's revenue only rose 7% in 2020, marking its slowest growth in four years, as a 16% drop in laser revenue partly offset its 11% growth in OpComms revenue. But its adjusted earnings still increased 28% as it cut costs and relied more heavily on its higher-margin OpComms business.

In the first half of 2021, Lumentum's revenue rose 3% year over year as its 6% growth in OpComms revenue offset its 35% drop in laser revenue. But its operating margin expanded again and its adjusted earnings grew 27%.

Analysts expect Lumentum's revenue and earnings to rise 6% and 19%, respectively, for the full year. Next year, they expect its revenue and earnings to grow 12% and 8%, respectively, as the expanding 5G market boosts demand for new optical chips and industrial lasers for cutting new 5G antennas.

Lumentum's outlook remained stable and its stock looks cheap at 14 times forward earnings, but its numbers seemingly failed to impress growth-oriented investors.

Why did the bulls rush to Apple?

Meanwhile, Apple's growth remained stable in fiscal 2020, which ended last September, and its growth accelerated in the first quarter of 2021 after it launched the iPhone 12, its first family of 5G devices.

Apple CEO Tim Cook.

Image source: Apple.

In 2020, Apple's revenue and earnings rose 6% and 10%, respectively, as rising sales of Macs, iPads, Apple Watches, AirPods, and its software services offset its 3% decline in iPhone sales.

In the first quarter of 2021, Apple's revenue rose 21% year over year. Its iPhone sales jumped 17%, accounting for 59% of its revenue, as new 5G plans convinced more customers to upgrade their devices. Apple's services revenue, which accounted for 14% of its top line, rose 24% and accounted for 14% of its top line as its total paid subscribers across all its services surpassed 600 million.

Apple's revenue also hit record highs across all its geographic regions, led by its 57% growth in the Greater China region. Its gross and operating margins also expanded as its earnings, supported by nearly $25 billion in stock buybacks, grew 35%.

Analysts expect Apple's revenue and earnings to rise 22% and 36%, respectively, this year. The main tailwinds include rising sales of the iPhone 12, which could surpass the iPhone 6 as its best-selling phone ever; the continued expansion of its services ecosystem, which could pull consumers away from other digital platforms like Netflix and Spotify; and the launches of new Macs, iPads, Watches, and AirPods.

Next year, analysts expect Apple's revenue and earnings to rise 4% and 5%, respectively, against tough year-over-year comparisons. However, its stock is still reasonably valued at 29 times forward earnings, and it pays a forward yield of 0.6%. Lumentum doesn't pay a dividend.

If you like Apple, just buy its stock

Most of Apple's suppliers can't outperform Apple over the long run, for three simple reasons: Apple operates a simpler business model than most of its suppliers, boasts plenty of pricing power in the consumer market, and usually enjoys the upper hand in price negotiations with its suppliers.

That's why Apple is still a better investment than Lumentum. Apple's growth rates might not be exciting, but they're stable, and its core businesses still have plenty of room to grow over the long term.

Lumentum's cyclical business is more complex, it's heavily dependent on a few big customers, and its lagging industrial laser business will continue offsetting the growth of its optical segment for at least a few more quarters. Lumentum isn't a bad stock, but I doubt it will top Apple this year.

 
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.