Lumentum produces optical chips for service providers and data center customers, 3D-sensing chips for multiple industries, and commercial lasers for manufacturing and inspection purposes.
Infinera's optical chips enable carriers to boost the bandwidth of their existing networks without laying down additional fiber. It accomplishes this by splitting the signals into more wavelengths or colors.
Lumentum's stock rose more than 20% over the past 12 months, as stable demand for its optical chips -- especially from its top customer, Apple -- offset its sluggish sales of commercial lasers.
Infinera's stock rallied more than 80%, as investors focused on its upcoming launch of next-gen 800G solutions instead of its tepid near-term revenue growth. But can Infinera continue to outperform Lumentum this year? Let's dig deeper into both optical companies to find out.
Lumentum's strengths are offsetting its weaknesses
Lumentum's optical communications division, which sells optical and 3D-sensing chips, generated 90% of its revenue in fiscal 2020, which ended last June. The remaining 10% came from its commercial laser division. Apple, which purchases 3D-sensing chips from Lumentum, accounted for 26% of its total sales.
Lumentum's revenue rose 7% in fiscal 2020, but that marked its slowest growth in four years. Its optical communications revenue rose 11%, but its laser revenue fell 16% as manufacturers shut down during the pandemic. Demand for its fiber lasers, which was already soft prior to the crisis, stayed sluggish.
Despite those challenges, Lumentum still grew its adjusted earnings 28% as it cut costs and sold more higher-margin optical chips.
Lumentum's revenue grew 3% year over year in the first half of fiscal 2021. Its optical communications revenue rose 6%, but its laser revenue declined another 35%. Yet its adjusted earnings increased 27%, as its gross and operating margins continued to expand year over year.
Lumentum expects its revenue to rise 6% to 9% year over year in the third quarter, as demand for new data center and mobile chips climbs and its sales of lasers improve sequentially. Rising sales of Apple's iPhone 12, its first family of 5G devices, should also generate strong tailwinds.
Analysts expect Lumentum's revenue and earnings to rise 6% and 19%, respectively, for the full year. But in fiscal 2022, they expect its revenue and earnings to grow 12% and 19%, respectively, as its lagging laser segment finally catches up to its optical communications segment.
Infinera's growth could accelerate this year
Infinera's revenue rose 3% in fiscal 2020, which nearly aligns with the calendar year. That represents a slowdown from its 39% growth in 2019, although that figure was significantly inflated by its acquisition of Coriant in late 2018.
Infinera's adjusted net loss narrowed for the full year, as stronger sales of its higher-margin 600G products and tighter cost controls boosted its gross and operating margins.
Current-generation fiber networks can transfer data at 100G to 200G speeds across short distances, and 400G to 600G speeds across longer distances. Many carriers have started to test out 800G connections for their wireline customers over the past year.
Infinera, Ciena (NYSE:CIEN), and Huawei Technologies are the three main players in the 800G market. Huawei's crippling sanctions outside of China should enable Infinera and Ciena to gain duopolies across many countries, and many carriers will likely split their 800G contracts between the two companies to avoid putting all their eggs in a single basket.
Therefore, Infinera expects its growth to accelerate in the second half of 2021 as it sells more ICE6 800G products. That's why analysts expect Infinera's revenue to rise 5% this year as it returns to profitability.
In fiscal 2022, they expect Infinera's revenue to grow another 9% and for its earnings to rise nearly sevenfold as it sells a much higher mix of ICE6 products.
The valuations and verdict
Lumentum trades at 13 times forward earnings and just three times next year's sales. Those low valuations indicate investors are still focused on the softness of its laser business instead of the growth potential of its optical and 3D-sensing technologies in a post-pandemic world.
Infinera trades at 24 times forward earnings and just 1.3 times next year's sales. Those reasonable valuations suggest the market hasn't fully baked the growth of its 800G business into its stock price yet.
I believe both stocks are fairly safe investments right now. But if I had to choose one over the other, I'd stick with Infinera because it has more near-term catalysts than Lumentum, it isn't weighed down by a single struggling business unit, and its growth isn't tightly tethered to a single customer.