Lumentum's Strong Q2 Earnings Beat Masks Severe Overvaluation and Cyclical Risks

What happened

Lumentum reported Q2 FY26 earnings of $1.67 per share, beating estimates by 18.68% and soaring nearly 300% year-over-year, driven by AI datacenter optics demand, as highlighted in a bullish Zacks article. This performance underscores operational execution, with Q3 guidance of $805M revenue and $2.25 EPS reinforcing near-term momentum. However, the DeepValue Master Report rates Lumentum a STRONG SELL, arguing the stock at ~$435 trades at extreme valuations—P/E ~122x and EV/EBITDA ~314x—that already price in unsustainable AI capex growth. Critical risks include ~$2.1B net debt, over 30% revenue concentration from two customers, commoditization in optical markets, and unresolved export-control inquiries that could disrupt access to key Asian markets. Thus, while the beat-and-raise quarter is impressive, it does not mitigate the core investment flaw: a valuation with no margin of safety, leaving investors exposed to sharp multiple compression if AI demand falters.

Implication

The earnings beat confirms Lumentum's near-term AI optics growth but fails to justify its sky-high multiples, which assume perpetual hyperscaler spending and ignore rising industry capacity that could erode margins. With net debt at ~$2.1B and customer concentration over 30%, any slowdown in AI capex or competitive pricing pressure could trigger severe under-utilization and margin compression, exacerbated by limited contractual visibility. Current holders should lock in gains by trimming positions, while potential buyers must wait for a significant pullback, such as to the $260 attractive entry level noted in the report, to improve risk-reward. Monitoring Q3 guidance execution and updates on BIS/DOJ inquiries is essential, but the stock remains a crowded, leveraged play with no valuation cushion. Overall, the investment case is weak, favoring caution over chasing momentum in a cycle-dependent name.

Thesis delta

The Q2 beat reinforces operational strength but does not shift the bearish thesis; the stock remains overvalued with embedded risks of multiple compression from cyclical normalization and competitive threats. If AI demand persists, revenue may grow, but the valuation already discounts best-case scenarios, leaving no room for error and maintaining the STRONG SELL recommendation.