Lumentum's Optical Backlog Growth Highlights AI Momentum Amidst Overvaluation and Structural Risks

What happened

A recent Zacks article points to Lumentum's surging optical circuit switch backlog and rising co-packaged optics orders as signals of accelerating AI-driven growth and margin strength. However, DeepValue's report notes that management has cited an OCS backlog above $400 million and a multi-hundred-million-dollar CPO order, but warns backlog is unreliable due to vendor-managed inventory and customer cancellation rights. While AI datacenter demand is driving impressive revenue growth, with Q2 FY26 up 65% year-over-year, the stock at ~$435 trades at extreme valuations, including a P/E of 122x and EV/EBITDA of 314x, which already price in sustained hyperscaler capex. The analysis emphasizes that margin recovery has depended partly on non-structural factors like lower excess charges, and the company faces significant risks from commoditization, competition, and ongoing export-control investigations. Thus, the backlog expansion, though operationally positive, does not mitigate the fundamental overvaluation or cyclical vulnerabilities that underpin the STRONG SELL rating.

Implication

The surging OCS and CPO orders reinforce Lumentum's operational momentum in AI optics, but at current valuations, this growth is fully discounted, offering no margin of safety. Management's disclosures about backlog unreliability and customer concentration highlight that these figures may not translate into durable revenue, especially without long-term commitments. High leverage, with net debt to EBITDA near 20x, and upcoming convertible maturities amplify financial risk if operating cash flow weakens during a potential capex slowdown. Export-control probes and competitive pressures from peers like Coherent could rapidly erode margins, triggering multiple compression even if revenue continues to grow. Therefore, while the momentum is real, it underscores a crowded, cycle-dependent trade where selling or avoiding new positions is prudent until valuation aligns with inherent risks.

Thesis delta

The new article does not materially alter the DeepValue thesis of a STRONG SELL. It confirms the operational growth that the report already acknowledges, but fails to address the core concerns of extreme valuation, high leverage, and cyclical exposure. Thus, the thesis remains unchanged: Lumentum is overvalued with significant downside risk, and investors should lock in gains or avoid entry at current levels.