There is no denying that we are in the midst of an artificial intelligence (AI) supercycle, a prolonged period of strong demand for products and/or services that outstrips supply.
The AI supercycle has been in progress for the past three years, overwhelming the supply capacities of chipmakers and software providers. This explains why chipmakers and software companies are sitting on massive backlogs. The demand for AI products and services is so strong that there isn't enough infrastructure to meet it, which explains the huge shortage of memory chips.
After all, memory is one of the most important cogs in the AI infrastructure ecosystem, enabling the transfer of large data volumes quickly so that AI data center chips can perform optimally without bottlenecks. This explains why AI data centers have been aggressively securing memory supply through long-term contracts.
A similar scenario is now emerging in optical networking and photonics products, which play a crucial role in moving massive datasets quickly between data centers or between chips to support AI workloads. Lumentum Holdings (LITE +3.81%) has been one of the biggest beneficiaries of the booming demand for optical and photonics components, with its shares rising 169% this year.
Let's see why this tech stock's stunning rally is poised to continue.
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Lumentum Holdings is growing at an incredible pace, but it can do even better
Lumentum released its fiscal 2026 third-quarter results (for the quarter ended March 28) on May 5. The company's revenue shot up 90% year over year to $808 million. What's more, the company's non-GAAP operating margin shot up by 21.4 percentage points year over year to 32.2% last quarter. This explains why Lumentum's non-GAAP earnings per share grew by 4.1x year over year to $2.37 per share.
NASDAQ: LITE
Key Data Points
Lumentum makes optical and photonic components, such as transceivers, switches, and lasers, which enable high-speed connectivity in data centers. Its products are key to quickly transporting large volumes of data in large AI chip clusters. It is worth noting that high-speed data transmission is essential in AI data centers to ensure that training and inference workloads run seamlessly without bottlenecks.
This explains why the demand for Lumentum's products is outpacing supply, as noted by CEO Michael Hurlston on the recent earnings call. Hurlston pointed out that the "supply demand imbalance is probably even higher than we reported in our last call, somewhere greater than 30%." Lumentum is taking advantage of the supply shortage by increasing the prices of its components.
The good news for Lumentum investors is that the massive investments in AI data centers should help sustain its red-hot growth. That's because the optical networking market's revenue is expected to jump by just over 5x by 2030 to $73 billion, clocking an annual growth rate of 39%, according to investment management firm VanEck.
The firm adds that component supply is poised to remain tight throughout 2027, suggesting that the favorable pricing environment that's fueling tremendous earnings growth for Lumentum is here to stay. So, it is easy to see why the company has guided for $2.95 in earnings per share on revenue of $985 million (at the midpoint) in the current quarter. Those numbers point toward another huge jump over the year-ago period's earnings per share of $0.88 and revenue of $481 million.
Is the stock still worth buying?
Lumentum's stunning surge in 2026 explains why it is now trading at an expensive 159 times earnings. However, the forward earnings multiple of 59 points to a massive jump in its bottom line. Moreover, Lumentum's exponential earnings growth justifies its premium valuation.
Even better, analysts are expecting its phenomenal earnings-per-share growth to continue following a 4x jump in its bottom line in fiscal 2026 to $8.25 per share.
Data by YCharts
If Lumentum indeed delivers $27.92 per share in earnings in fiscal 2028 and trades in line with the tech-focused Nasdaq Composite index's average earnings multiple of 43, its stock price could jump to $1,200. That points toward a potential upside of 20%. However, this AI stock could deliver bigger gains, as the market is likely to reward it with a premium valuation given its phenomenal earnings growth.
That's why it isn't too late for growth-oriented investors to buy Lumentum, as its terrific earnings power will pave the way for more upside in its stock price.
