Notes on $Lumentum(LITE.US) ahead of earnings tomorrow.

On the Q3 call (May), the CEO put the demand/supply imbalance at “somewhere greater than 30%” and said the company is “having to make choices across the company” to service demand, noting that significant customers are looking to up their orders that “we simply can't service”.

Then on pricing, the CFO said “prices are holding or they're increasing for what customers want”.

When you combine supply constraints with relative pricing power, you get a pretty powerful company...

Ultimately, Lumentum can't be competed away and forced out of the market mainly because of their 200G EML volume production. Mitsubishi, Sumitomo, Furukawa and $Coherent Corp.(COHR.US) can all do 100G, but no one can do 200G like Lumentum, and at their volumes since they're the only supplier shipping 200G EMLs in volume today.

On capacity, Lumentum's EML output is up ~8x since FY23 and management guided to roughly 50% more InP output and more than 50% EML unit growth from the December quarter last year to the December quarter this year. All while the demand/supply gap has extended. Their fabs are clearly straining, with the Japan wafer fab already “fully allocated”.

And the new Greensboro InP fab won't come online until 2028 mainly because of reactor installs and cleanroom work. Even then, any incremental output would still need to pass customer qualifications before hitting the topline, so it's still some time before seeing any sort of material benefits.

Honestly, my first instinct on any “sold out for years” claim is skepticism, however with Lumentum, their output went up ~8x and the demand gap still got wider.

That's pretty insane, and is why the stock trades at relatively lofty valuations today. YTD, a ton of pricing-in has already happened, but I do see continual growth vectors incoming:

Looking at industry numbers, 800G+ goes from ~20% of transceiver shipments in 2024 to over 60% in 2026, and EML/CW laser capacity roughly doubles this year to ~50M units a month (TrendForce puts the 2026 figure at 50.7M). Yet lasers are still a bottleneck, so if supply doubles and the shortage doesn't close, the demand curve only steepens.

- For context, TrendForce has the top three EML makers (Lumentum, $Broadcom(AVGO.US), Mitsubishi) holding ~72% of the market between them, and only Lumentum ships 200G in volume.

With CPO, $Lumentum(LITE.US) is the named laser supplier on $NVIDIA(NVDA.US) Spectrum-X/Quantum-X photonics switches (Nvidia has signaled it wants more than one laser source over time, but Lumentum is the one in the design today). The “CPO kills the optics suppliers” bear case has always struck me as an argument made by people who haven't looked at where the light actually comes from: the transition moves the laser into an external module and makes it more important…not less.

Personally, I estimate hundreds of CW lasers per 512-port switch. Lumentum already has a multi hundred million $ CPO/ELS PO on the books which gets delivered in H1'27. You can link this to $SIVE because their InP lasers going onto $GlobalFoundries(GFS.US) SiPh platform proves that SiPh still needs an InP light source, regardless of whichever packaging approach dominates at the end of the day.

There's also a vertical integration story to Lumentum that mirrors $Applied Optoelectronics(AAOI.US)'s but it runs in the opposite direction. $Applied Optoelectronics(AAOI.US) is a module maker that built its own laser fab; $Lumentum(LITE.US) is a laser maker that bought a module business (Cloud Light) and is closing the loop since its own CW lasers are set to go into ~20% of its own transceivers this quarter, and 200G EML revenue more than doubled sequentially last quarter.

So in a laser-short world, the module makers who own their laser supply actually ship, and the ones who don't just sit on their hands. Both $Lumentum(LITE.US) and $Applied Optoelectronics(AAOI.US) worked out the same thing from opposite ends, and the fact that a module maker and a laser maker independently converged on full stack integration should tell you where the bottleneck is…

Just touching on the proposed FCC China transceiver ban again. This would actually cut both ways for $Lumentum(LITE.US). Cloud Light builds in Thailand and benefits directly from that shift. On the flip side, Chinese vendors make roughly 60% of datacom optical component revenue, with InnoLight and Eoptolink taking around 60% of the high-end 800G+ orders — and $Lumentum(LITE.US) sells EMLs to them.

The problem is that $Lumentum(LITE.US) reports revenue by shipping destination, not end customer: China plus Hong Kong was ~25.5% of last quarter's revenue.

That figure overstates true China exposure, because much of it is chips delivered to contract manufacturers building for US hyperscalers, but it also hides how much of the EML business depends on Chinese module makers specifically.

Honestly, nobody outside the company knows the real split. But if Chinese customers' orders fall before Western module makers scale up to replace them, Components revenue could dip for a quarter or two, and it's quite hard to forecast accurately ahead of any earnings releases. (Assuming the ban actually goes ahead).

Even so, I think the ban would be a net positive because it just changes who assembles modules rather than impacting the demand side. Chinese module makers switching to domestic EML suppliers would still face a multi year qualification cycle at 200G that they can't shortcut. Upstream, China's export controls on InP substrates have pushed 6-inch wafer prices up ~250% (roughly $1,400 to $5,000 since February 2025), all while $Lumentum(LITE.US) locked their own substrate supply a couple weeks ago with a capacity reservation at $AXT(AXTI.US) running through to 2031, ahead of anything peers have signed.

Obviously, that supply still sits inside China's export permit regime (AXT ships from China and says it can't predict permit timing) but in my view, Lumentum being first in line is worth more than the risk it carries.

For a TLDR on key watchpoints from the Lumentum earnings call:

- 200G EML trajectory within datacom lasers (it more than doubled sequentially last quarter) and the overall EML unit ramp.

- ELS volumes and any second 1.6T Cloud Light customer.

- Greensboro InP timeline and whether first output slips or gets pulled forward.

After the July selloff, it does seem like a lot of froth has come out ahead of this ER compared to a couple of weeks ago.

Disclosure — I have a position in $Lumentum(LITE.US).