Micron (MU +5.08%) and Lumentum (LITE +1.03%) both provide essential components for electronic devices. Micron is one of the world's largest producers of DRAM and NAND memory chips, while Lumentum produces optical chips, 3D-sensing chips, and commercial lasers.
Over the past 12 months, Micron's stock has rallied more than 50% as memory prices passed a cyclical trough and started rising again. But Lumentum's stock stayed nearly flat as pandemic-related disruptions of its commercial laser business offset the stable sales of its optical and 3D-sensing chips.
Image source: Getty Images.
Will Micron stay ahead of Lumentum for the foreseeable future? Let's take a fresh look at both companies to find out.
The differences between Micron and Lumentum
Micron generated 71% of its revenue from DRAM chips last quarter. Another 26% came from NAND (flash memory) chips, while the rest came from other types of memory chips.
Micron is the world's third-largest manufacturer of DRAM chips and the fifth-largest producer of NAND chips. Samsung is the leader in both markets.
Lumentum generated 92% of its revenue from its optical communications business last quarter. This segment mainly produces optical chips for service providers, as well as 3D-sensing chips for mobile devices, cars, 3D printers, and other industrial machines.
Its top optical customer is Apple (AAPL 2.15%), which accounted for 26% of Lumentum's total revenue last year. Its second-largest customer is Huawei, but that percentage has been declining due to blacklists and sanctions against the Chinese tech giant.
The rest of Lumentum's revenue comes from its commercial laser business, which helps industrial customers manufacture products.
Micron still has room to run
Micron suffered a major slowdown in 2019 after DRAM and NAND prices peaked. That reversal was caused by a supply glut and sluggish demand from producers of smartphones, PCs, and other consumer electronics.
However, Micron and its industry peers subsequently curbed their production of new chips, and market demand warmed up again across the 5G, gaming, cloud, and data center markets. The pandemic then amplified that growth by sparking fresh demand for new PCs.
The pandemic also temporarily disrupted the global production of semiconductors. As a result, the market prices for DRAM and NAND chips rose again, and Micron sold its chips as fast as it could produce them.
That's why Micron's revenue and non-GAAP earnings growth significantly accelerated in the first half of 2021 after two years of painful declines.
|
Growth (YOY) |
FY 2019 |
FY 2020 |
1H 2021 |
|---|---|---|---|
|
Revenue |
(23%) |
(8%) |
21% |
|
Non-GAAP EPS |
(47%) |
(55%) |
43% |
Data source: Micron. YOY = year over year.
Analysts expect Micron's revenue and earnings to grow 26% and 96%, respectively, for the full year. Next year, they expect its revenue and earnings to rise another 31% and 90%, respectively, as the global semiconductor shortage continues. That acceleration indicates Micron's latest growth cycle won't end anytime soon.
Lumentum faces more challenges
Lumentum's commercial laser business was already struggling before the pandemic hit, mainly due to soft demand for its fiber lasers. It offset that slowdown with the growth of its optical communications unit in the past, but both divisions suffered slowdowns during the pandemic.
|
Growth (YOY) |
FY 2019 |
FY 2020 |
9M 2021 |
|---|---|---|---|
|
Revenue |
25% |
7% |
3% |
|
Non-GAAP EPS |
11% |
27% |
22% |
Data source: Lumentum. YOY = year over year.
The pandemic disrupted optical network upgrades as well as the production of new high-end phones and connected vehicles. As a result, Lumentum's optical communications revenue rose just 11% in 2020 -- compared to its 29% growth in 2019 -- and barely offset its 16% drop in laser revenue.
That pressure persisted in the first nine months of fiscal 2021, as its optical communications revenue rose just 7% and its laser revenue plunged 32%. In China, Lumentum continues to struggle with the loss of Huawei's orders and delays in 5G fronthaul deployments.
All these problems overshadow Lumentum's strengths, which include Apple's rising iPhone shipments and its tighter cost controls -- which boosted its earnings even as its revenue growth decelerated. It also expects its laser business to stabilize sequentially in the fourth quarter.
However, analysts expect Lumentum's revenue to rise just 3% for the full year and stay nearly flat next year. They expect its earnings to rise 15% this year, but dip 9% next year as it ramps up its investments.
The obvious winner: Micron
Micron and Lumentum are both cyclical stocks, but Micron's business is in a clear uptrend as Lumentum's searches for a bottom. Micron's stock also trades at less than eight times forward earnings, which is much lower than Lumentum's forward P/E ratio of 14.
Micron generates stronger growth at a lower valuation, and its business is much easier to understand than Lumentum's complex mix of optical chips and commercial lasers. Therefore, I believe Micron will remain the better buy for the foreseeable future.
