Lumentum stock: Is the valuation too rich heading into Q4 results?

Lumentum stock continues to rebound, reaching its highest level since June 16 as investors await its upcoming earnings report, which is expected to provide further insight into the company’s business performance amid ongoing valuation concerns. LITE surged to $920, representing a 56% gain from its lowest level this month.

Lumentum stock jumps as valuation concerns remain

LITE stock has jumped sharply in the past few years. It has jumped by 135% this year and by nearly 1,000% in the last five years. This surge intensified after Nvidia invested $2 billion in the company, citing the strong demand of its products in data centers. 

The rally, however, has made Lumentum a highly overvalued company, which is much higher than other companies. For example, data shows that the company's trailing price-to-earnings (PE) rose to 147, higher than the technology sector median of 26. 

The trailing multiple normally looks at its historical earnings report. As such, most traders focus on the futures metrics, which are usually based on estimates. In this case, based on the GAAP and non-GAAP metrics, the company has forward multiples of 108 and 180, respectively.

These metrics have soared because of the ongoing hype surrounding its products, which includes optical transceivers, EML lasers, CW lasers, and DML lasers. These products have become highly popular in data centers. 

The most recent results showed that its revenue jumped to $808 million in the third fiscal quarter from $452 million in the same period last year. Its gross margins jumped to 44.2%, helped by higher prices and a jump in deals by companies like Microsoft, Google, and Meta Platforms.

Lumentum earnings to provide color on growth

Therefore, the upcoming earnings report will provide more information about its growth. Per Yahoo Finance, analysts expect the upcoming report to show that its revenue more than doubled in the fourth quarter to $987 million. This growth makes it one of the fastest-growing companies in the United States.

The growth is because of its strong business performance in the last quarter, helped by strong data center growth. In the last big-tech earnings, the companies announced that they would maintain their substantial capital expenditure plans. 

Analysts have a mixed opinion about the LITE stock price. Citigroup has reiterated its buy rating, while TD Cowen slashed the outlook from $995 to $800. On the other hand, top analysts from Northland Securities, Barclays, and Citic Securities have boosted their targets.

LITE stock technical analysis

Lumentum stock chart | Source: TradingView

The daily chart shows that the LITE stock has rebounded from this month’s low of $592 to $850 today. It has remained above the 50-day and 100-day Exponential Moving Averages (EMA).

Most importantly, it remains above the upper side of the descending channel, which is part of the bullish flag pattern. This pattern normally leads to more upside over time. 

The Relative Strength Index (RSI) has crossed the neutral level of 50 and is pointing upwards. Therefore, the most likely forecast is that it continues rising as bulls target the year-to-date high of $1,085. A move above that level will point to further gains, potentially to $1,100.