Lumentum Growth Doubles, Coherent Orders Booked Through 2028, Why Is Optical Communication Sector Falling Instead of Rising?

Coherent reported third-quarter revenue of $1.806 billion, up 21% year-over-year and exceeding expectations of $1.78 billion; adjusted earnings per share were $1.41, also beating the expected $1.40. GAAP net income surged to $191.4 million from $16 million in the same period last year.

Coherent's valuation is the core variable in this sell-off; prior to the earnings release, the stock had gained 86% year-to-date, with a forward P/E ratio as high as 56x. GuruFocus's discounted cash flow (DCF) model estimates its intrinsic value at just $74.44; regardless of the model's precision, it is a fact that the share price has far exceeded traditional valuation frameworks.

The midpoint of the company's fourth-quarter revenue guidance was $1.98 billion, slightly above the expected $1.913 billion, but the lower end of the range barely met expectations, failing to provide stronger upward momentum for the stock.

Lumentum's earnings were equally impressive, with revenue doubling year-over-year to a record $808 million and non-GAAP earnings per share of $2.37 beating the expected $2.27, yet shares still fell over 3% after-hours.

Bank of America analyst Vivek Arya noted that its price-to-sales ratio exceeds 11x, suggesting limited upside, and maintained a Neutral rating. JPMorgan Chase ( JPM) analyst Meta Marshall also believes the share price has fully priced in optimistic expectations.

Against the backdrop of explosive demand for AI optical modules, Lumentum's pace of capacity expansion and gross margin improvement failed to keep up with the market's optimistic assumptions; consequently, this "in-line" earnings report was priced as a "lack of surprise" under high valuation pressure, triggering a sell-off.

The earnings reports from both Coherent and Lumentum revealed the same issue: the pace of capacity expansion is failing to keep up with the growth in orders.

Morgan Stanley analysts noted following Coherent's results: "While AI orders are strong, backlogs are accumulating due to InP supply chain bottlenecks, yet revenue recognition has not accelerated accordingly." With more orders than can be filled, production lines must be expanded one by one; it is precisely these capacity bottlenecks that are curbing revenue growth.

Lumentum management similarly acknowledged that demand across multiple product lines far exceeds capacity, with supply constraints expected to persist throughout the 2026 calendar year.

According to Coherent's Q3 call, the 6-inch production line is not expected to contribute significant capacity until the end of 2026; lead times for InP substrates have now stretched to over 26 weeks, which will directly impact approximately 15-20% of potential revenue. Meanwhile, Lumentum's capital expenditure for capacity expansion grew by only 8% quarter-over-quarter in Q4, far trailing the rate of order growth.

Furthermore, TSMC's tight CoWoS packaging capacity has indirectly hampered the delivery schedule of optical modules; the delivery pace of NVIDIA GPUs is constrained by packaging capacity, placing synchronized pressure on optical modules as complementary components.

Capacity bottlenecks are a double-edged sword: in the short term, they imply that the pace of revenue recognition may lag; in the long term, demand exceeding supply means companies enjoy greater pricing power. However, within the earnings season window, the market's patience has been eroded by high valuations and pulled-forward expectations, leading it to view capacity bottlenecks as a negative signal.

Earnings results from both companies confirm that the boom in the AI optical communications sector is still accelerating, but valuations have already overshot fundamentals.

Investors should monitor two key metrics going forward: first, the quarterly capex conversion rate and gross margin trends, which dictate when capacity expansion at Coherent and Lumentum will materialize as profit. Second, whether the valuation gap between these two and their peers is narrowing; if so, it signals a shift in the market's 'scarcity premium' logic, suggesting the sector may be bottoming out.

Overall, the current sell-off in the optical communications sector resulted from a combination of stretched valuations and capacity bottlenecks; while fundamentals have not deteriorated, the lack of fresh catalysts suggests the compression of valuation premiums may not yet be over.

This content was translated using AI and reviewed for clarity. It is for informational purposes only.