Lumentum's (LITE 3.82%) stock price has declined nearly 50% over the past three years. The maker of optical chips and lasers lost its luster as its revenue growth cooled off, its margins shrank, and it faced fresh competitive threats.

Since investing often involves looking toward the potential for future growth, should investors consider buying Lumentum as a turnaround play for 2024? Let's look at its previous challenges, its plans for growth, and its valuation to find out.

A digital illustration of optical circuits.

Image source: Getty Images.

What happened to Lumentum over the past five years?

In fiscal 2023 (which ended this July), Lumentum generated 88% of its revenue from its optical communications segment. This business produces optical chips for service providers, as well as 3D-sensing VCSEL (vertical-cavity surface-emitting laser) chips for mobile devices, cars, 3D printers, and other industrial machines. The remaining 12% of its revenue came from commercial manufacturing lasers. Here's how those two core businesses fared over the past five years.

Metric

FY 2019

FY 2020

FY 2021

FY 2022

FY 2023

Optical communications revenue growth

29%

11%

7%

(6%)

3%

Lasers revenue growth

4%

(16%)

(25%)

59%

8%

Total revenue growth

26%

7%

4%

(2%)

3%

Data source: Lumentum.

The growth of its optical communications segment accelerated in fiscal 2019 as Apple (AAPL 1.02%) started installing its VCSEL chips in its iPhones. Other smartphone makers followed Apple's lead and started buying its VCSEL chips.

But over the following three years, the smartphone market cooled off. Apple also split Lumentum's VCSEL orders with Coherent (COHR 2.11%) and Sony (SONY 1.47%). As a result, the Mac maker's contribution to Lumentum's top line dropped from 30% in fiscal 2021 to 12% in fiscal 2023. At the same time, Apple reportedly increased Sony's share of its total VCSEL orders for the iPhone 15 because its chips were faster and more power efficient.

The U.S. trade restrictions against China also forced Lumentum to stop selling chips to Huawei, which had accounted for 11% of its revenue in fiscal 2021. That percentage dropped to zero over the following two years. Finally, macro headwinds over the past two years throttled its sales of optical chips to service providers, industrial customers, and telecom equipment giants like Ciena and Nokia, which together accounted for 26% of its revenue in fiscal 2023.

That gradual recovery of its commercial laser business, which suffered major disruptions during the pandemic, couldn't offset the sluggish growth of its optical communications segment. That slowdown drove it to buy NeoPhotonics and Cloud Light -- which both serve the higher-growth cloud and data center markets -- over the past two years to diversify its customer base.

Can Lumentum impress the bulls again?

For fiscal 2024, analysts expect Lumentum's revenue to decline 17% to $1.47 billion, even as it adds Cloud Light to its newly formed "cloud and networking" unit (formerly known as its optical communications unit). Lumentum also racked up a net loss of $132 million in fiscal 2023, and analysts project an even wider net loss of $189 million in fiscal 2024.

The company's slowing revenue growth, recent acquisitions, rising mix of lower-margin products, and underutilization of its factories all crushed its gross and operating margins in fiscal 2023. Analysts expect that pressure to persist and reduce its adjusted operating margin from 19.2% in fiscal 2023 to just 4.9% in fiscal 2024.

Those bleak forecasts indicate that Lumentum hasn't reached the trough of its cyclical downturn yet. It's preparing for a future without Apple as it expands its portfolio of higher-speed optical devices for cloud and data center customers, but those new businesses simply aren't generating enough revenue to offset its other weaknesses yet.

Its valuation isn't compelling yet

With an enterprise value of $4.5 billion, Lumentum might seem reasonably valued at 3 times this year's sales and 28 times its forward-adjusted earnings. But it isn't cheap yet, and it's easy to find other tech stocks that have more growth potential or are trading at lower valuations. It also lacks clear competitive advantages against Sony and Coherent in the VCSEL market. Simply put, I believe Lumentum's decline over the past three years was justified, and I don't see any compelling reasons to buy its stock as a turnaround play for 2024.