Lumentum Holdings (LITE -0.74%) stock took a beating so far in 2025. That's not surprising, considering the broader weakness in the stock market on account of macroeconomic headwinds caused by the tariff-fueled trade war.
However, the 9% drop in Lumentum stock this year doesn't seem justified if we consider that artificial intelligence (AI) has been driving a solid turnaround in the company's business. Lumentum is known for selling optical and photonics components that enable high-speed data transmission in communications networks and data centers, and the demand for its products has taken off thanks to AI.
Image source: Getty Images.
This explains why the company's growth has been picking up in recent quarters. In the latest fiscal 2025 third-quarter earnings report (for the three months ended March 29), which was released on May 6, Lumentum easily beat expectations.
Let's see what's driving Lumentum's growth, and why it may be a good idea to buy this tech stock hand over fist right now.
Lumentum's growth is set to accelerate remarkably
Lumentum's fiscal Q3 revenue increased 16% year over year to $425 million, while its non-GAAP net income nearly doubled year over year to $0.57 per share. The company's cloud and networking business played a key role in driving this solid growth as it accounted for 86% of the company's top line. Lumentum's non-GAAP operating margin shot up to almost 11% from a slightly negative reading in the year-ago period, which explains the big jump in its bottom line.
Lumentum credits the big jump in its margins and earnings to an improvement in manufacturing utilization rates and a favorable product mix. The company is expecting its gross margin to improve on a sequential basis in the current quarter as well, despite an estimated negative effect of 100 basis points on account of tariffs.
Additionally, Lumentum says that "AI-driven cloud growth will continue to drive our financial momentum into Q4 and beyond" despite the macroeconomic headwinds caused by the tariff turmoil. That's not surprising, as demand for Lumentum's externally modulated lasers (EML), which are used in optical communications because of their ability to enable high-speed data transmission with high efficiency, increased because of AI.
Lumentum's EML shipments hit a record last quarter, and the company believes that it can double revenue from this product this year compared to June 2024 levels. Moreover, the company is increasing its manufacturing capacity of EMLs to support the strong demand for these components. Such a move could pay off in the long run, since sales of optical components used in AI clusters are expected to double from $5 billion last year to $10 billion next year.
As such, Lumentum is forecasting a significant acceleration in revenue. The company guided for revenue of $455 million in the current quarter at the midpoint of its guidance range, which would translate into a year-over-year increase of 48%. It's expecting non-GAAP earnings per share to land between $0.70 to $0.80 per share, which points toward a significant multiplication over the year-ago period's figure of $0.06 per share.
Analysts expect 23% gains from the stock in the coming year, but it could do much better than that
Lumentum carries a 12-month median price target of $82, as per 18 analysts covering the stock. That points toward an 8% jump from current levels. However, a sharp spike in Lumentum's earnings growth could eventually translate into much stronger gains. Analysts project an 88% increase in Lumentum's earnings for fiscal 2025 to $1.90 per share. The forecast for the next fiscal year is even stronger, followed by another impressive jump in fiscal 2027.
LITE EPS Estimates for Current Fiscal Year data by YCharts.
Assuming Lumentum manages to achieve $4.77 per share in earnings in fiscal 2027 and trades at 25 times earnings at that time (in line with the tech-laden Nasdaq-100 index's forward earnings multiple), its stock price could hit $120 in a couple of years. That points toward potential gains of 58% from current levels.
Given that Lumentum is trading at just 19 times forward earnings, investors can buy this AI stock at an attractive valuation right now before it takes off in the long run.
