Lumentum's Q2 Beat Reinforces AI Momentum but Heightens Valuation Fragility

What happened

Lumentum reported better-than-expected Q2 FY26 results, with revenue of $665.5M up 65% YoY and EPS of $1.67 beating consensus, while issuing Q3 guidance above estimates at $805M revenue and $2.25 EPS, driven by strong AI datacenter optics demand. This performance has prompted analysts to raise forecasts, reinforcing the market narrative of Lumentum as a premier AI optical winner amid elevated hyperscaler capex. However, the DeepValue master report notes that the stock has surged ~418% to ~$435, trading at extreme valuations like P/E ~122x and EV/EBITDA ~314x, with no margin of safety. Critical risks persist, including commoditization and pricing pressure in high-speed optics, high leverage with net debt of ~$2.1B, and regulatory exposure from BIS/DOJ inquiries. The beat-and-raise quarter does not address these structural vulnerabilities, as the current price already discounts sustained AI growth, leaving the stock vulnerable to multiple compression.

Implication

First, the Q2 beat and raised guidance confirm Lumentum's near-term execution in capturing AI datacenter demand, which may support short-term momentum but doesn't alter the overvalued base case. Second, the stock's rally to ~$435 amplifies its dependence on flawless AI capex continuation, with any slowdown likely triggering sharp de-rating given high multiples. Third, margins are at risk from increasing competition and ASP erosion in 800G/1.6T optics, which could reverse recent non-GAAP gains and expose balance-sheet stress. Fourth, customer concentration and lack of long-term commitments mean revenue visibility is weak, making the business highly cyclical and sensitive to hyperscaler spending cuts. Fifth, with the DeepValue report rating it a STRONG SELL and targeting an attractive entry at $260, prudent investors should lock in gains or stay sidelined until valuation better reflects these risks.

Thesis delta

The positive Q2 results and guidance underscore Lumentum's operational strength in the AI up-cycle, but they do not shift the bearish thesis centered on extreme overvaluation and cyclical fragility. The stock's price increase further entrenches the disconnect from intrinsic value, keeping the STRONG SELL rating unchanged as risks like competition, leverage, and export controls remain unmitigated.