Palantir Technologies has been one of the most favored investments on the market in recent years. The stock has risen 160% in the past year as investors have rushed to buy its shares hand over fist to capitalize on the fast-growing demand for artificial intelligence (AI) software.
However, shares of the AI software specialist have been under pressure of late, and that's not surprising as the stunning rally that the stock has registered in the past three years has sent its valuation to exorbitant levels.
However, there's another AI stock that has recorded bigger gains than Palantir in the past year, jumping a whopping 197%. What's more, this company is trading at a significantly cheaper valuation despite delivering remarkable growth. Let's take a closer look at this name and see why it is worth buying hand over fist.
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The need for fast data transmission in AI data centers has supercharged this company
Data centers handling AI workloads need to move huge amounts of data quickly so that large language models (LLMs) and inference applications aren't bogged down by high latency or slow speeds. Even a fast graphics processing unit (GPU) can be handicapped by slow networking speeds.
This is where Lumentum Holdings (LITE +10.12%) steps in with its optical and photonic products that are deployed in communication networks and data centers. The company's laser components and optical transceivers are in terrific demand thanks to their ability to speed up data center connectivity. CEO Michael Hurlston pointed out on Lumentum's recent earnings call:
Our growth is powered by AI demand spanning our laser chips and optical transceivers inside data centers, as well as the interconnected long-haul networks that link them. In fact, we estimate that over 60% of our total company revenue now comes from cloud and AI infrastructure, driven both directly by hyperscale customers and indirectly through network equipment and optical transceiver manufacturers that embed Lumentum components in their solutions.
The company released its fiscal 2026 first-quarter results (for the three months ended Sept. 27) on Nov. 4. It reported a terrific year-over-year increase of 58% in revenue to $534 million. Its bottom-line growth was even more fantastic, with non-GAAP (adjusted) earnings growing just over sixfold from the year-ago period to $1.10 per share.
NASDAQ: LITE
Key Data Points
Lumentum's management credits this massive bottom-line increase to an improvement in manufacturing utilization rates and an improvement in the product mix, driven by stronger data center demand. As a result, its non-GAAP operating margin shot up by almost 16 percentage points year over year to 18.7%.
Looking ahead, Lumentum's guidance makes it clear that its impressive growth is here to stay. The company expects to earn $1.40 per share in the current quarter on revenue of $650 million. Those numbers are well ahead of what Wall Street was anticipating, and point toward a massive increase from its revenue of $402 million and non-GAAP earnings of $0.42 per share in the year-ago period.
The good part is that Lumentum can sustain its terrific growth in the long run, driven by an increase in AI data center investments. According to one estimate, the market for photonic components could jump by 8.6 times over the next decade, generating $54 billion in annual revenue in 2035 as compared to just over $6 billion this year. AI is going to be a big catalyst behind this jump.
Lumentum, therefore, is at the beginning of a massive growth curve, especially considering that it seems to be one of the key players in this market. The company is expected to deliver $2.59 billion in revenue this year, up by 57% from last year, and that suggests that it is on track to grab a sizable chunk of the photonics market this year.
Lumentum's growth potential and valuation make it a no-brainer buy
Lumentum stock is trading at 39 times forward earnings even after delivering outstanding upside in the past year. Additionally, its price-to-sales ratio is quite reasonable at 9, which is in line with the U.S. technology sector's average.
These multiples are way lower than Palantir, which has a sales multiple of 114 and a forward price-to-earnings ratio of 175. Another thing worth noting is that Lumentum's earnings grew at a much faster pace than Palantir's in the previous quarter. Looking ahead, analysts are expecting Lumentum to continue growing at a solid pace.
LITE EPS Estimates for Current Fiscal Year data by YCharts
Assuming Lumentum achieves $9.36 per share in earnings after three years and maintains its earnings multiple at that time (which it should thanks to its accelerating growth and bright prospects), its stock price could jump to $365. That suggests potential gains of 51% from current levels, though Lumentum could deliver bigger gains than that since the end-market opportunity it is sitting on could help it grow at a faster pace than consensus estimates.
