Parkev Tatevosian, CFA on $LITE (Oct 30, 2026)

Lumentum, whose trading symbol is LIT, announced a 109% increase in revenue in its most recent fiscal quarter. The company benefits from the trend among ultra-wideband computing companies to adopt optical communication technologies, a category in which this company excels.

Management expects these positive results to continue, forecasting similar revenue growth for the next quarter, averaging up to 130% year-over-year. It's not surprising that Lumentum's stock is expected to rise by more than 143% here in 2026.

This is one of the undervalued AI stocks that I've categorized as a buy for investors in 2026.

So, now investors are asking me, what do I think of the stock at this new high price level? Is there still a chance to buy, or is it too late? So, let’s take a look at the business together, review recent performance, compare it to long-term performance, and then evaluate the valuation it made today in the discounted cash flow model to determine whether it is still a buying opportunity for investors looking to take advantage of this unprecedented boom in AI spending.

So, it's not just the company's management team that's optimistic about its prospects. Wall Street analysts who follow Lumentum expect its earnings per share to grow by more than 100% over the next few years.

It is not just a phenomenon for a quarter of a year or a year. This business is thriving and is likely to continue to do so for several years to come, especially as the increasing computing needs of companies using these data centers shift towards more optical communications.

As its revenues grow, the company's profitability also expands.

When I see companies growing their revenues significantly, and in this case, the revenue of this business is growing by more than 100%, then this revenue growth is accelerating, isn't it? Even the second derivative is increasing.

In its last fiscal quarter, the company achieved growth of 109%, and in the next quarter they expect growth of 130% on average. So, we have a business characterized by rapid revenue growth and expanding profit margins.

Its operating profit margins have improved from -25% in 2024 to 18% over the past 12 months. Therefore, this seems to me like a business that is experiencing an organic increase in demand for its products and services.

That assessment isn't easy to justify, is it? We can look around and see that spending on artificial intelligence is skyrocketing, and companies that are spending on data centers are not taking a conservative approach to their spending.

They are looking to buy the most effective, most advanced, and latest technology they can get their hands on. Currently, optical solutions and optical connections are the best service of their kind to maximize the potential of your data center.

The balance sheet is also in a better position than it was in 2026 when the company had approximately $3.25 billion in long-term debt. They used up a portion of their cash flow and have now cut their debt by almost half to 1.65 billion.

Their total cash balance and short-term investments now amount to more than 2.7 billion.

Therefore, if the company chooses to do so, it can use its cash and short-term investments to pay off all of its debt. But I don't think this is necessary. I don't think you need to do that.

It is not a bad thing for your company to have some debt, especially if the cost of that debt is reasonably attractive, which is the case for Lumentum.

The company has a strong business, and artificial intelligence is booming, so lenders are not asking for very high interest rates to lend money to Lumen Technologies.

Finally, I wanted to look at the evaluation. Starting with a forward price-to-earnings ratio of 25, this looks ridiculously cheap for a company whose revenues are growing by more than 100%.

A company that expects earnings per share to grow by more than 100% for the next few years.

Seeing this company trading at a forward price-to-earnings ratio of 25 seems to me a very attractive valuation for long-term investors. Of course, there is a cyclical nature to the work.

Earnings per share are booming now and will probably boom for the next few years, but will then most likely stabilize. Not in 2026, not in 2027, and probably not even in 2028, but perhaps starting in 2029, and perhaps in 2030, earnings per share growth will most likely stabilize and return to its long-term average, as I doubt the company will achieve an earnings per share growth rate approaching 100%.

Today, I also updated the company's discounted cash flow estimates, and raised my expectations for the amount of free cash flow the company will generate from today onwards and into the very long term.

After my updated calculations, I estimated the value of the company at $1058. The current market price is 915, so even after applying the margin of safety, the stock appears to be undervalued using this metric as well.

So, as I mentioned, I rated the stock as a buy opportunity throughout 2026, and my last update was on May 18, 2026. Today, I reiterate my buy rating for Lumen stock with a relatively low conviction level and a relatively low confidence level, because the stock price has already risen significantly in 2026.

The headwinds facing the macroeconomy and the question marks surrounding artificial intelligence leave me with some concerns about the short term. But in the long run, I think this company will do well, and I think investors who buy the stock today, when comparing the risks to the returns, will find it a worthwhile investment.