Shares of optical communications equipment and laser maker Lumentum (LITE 3.36%) were up by 3% as of 1:53 p.m. ET on Friday after Craig-Hallum analyst Richard Shannon upgraded the stock to buy. Shannon assigned Lumentum a new and improved price target of $65 as well, up 35% from his previous target.
Why upgrade Lumentum?
Lumentum's business has "strong exposure" to the telecom sector, notes Shannon. (That is a bit of an understatement: According to data from S&P Global Market Intelligence, optical communications sales accounted for 88% of its $1.8 billion in revenues last year.) And Shannon is predicting that the telecom industry's cycle will bottom out in 2024 as data transfer needs for cloud computing and AI begin to outstretch the existing capacities of data networks.
On top of this, Shannon argues that the potential for the Fed to cut interest rates in 2024 could be a tailwind for the stock. Small caps like Lumentum (which has a $3.5 billion market capitalization) have already been rallying on the prospect. Lumentum is up by 47% over the last two months.
Is it too late to buy Lumentum stock?
And yet, the fact that Lumentum is already up so much over such a short time should perhaps give investors pause about jumping in now.
The company has been unprofitable for the last five quarters, so it doesn't currently have a price-to-earnings ratio one can gauge it by. It's also currently free-cash-flow negative for the last 12 months, which makes it difficult to value the stock on past performance.
Nor does the company's expected future performance look likely to astound. According to the consensus forecast of analysts polled by S&P Global, Lumentum will book continued losses over the next two years before finally turning profitable again in 2026. And even then, analysts are only predicting a profit of about $0.42 per share for 2026.
Call me a skeptic, but paying more than 126 times forward earnings for earnings that are at least three years away doesn't seem like a good bet to me.
