Barclays Upgrades Lumentum to Buy! AI Optical Communications Stock Down 30% Presents Buying Opportunity: CPO Still Awaits

Optical communications supplier Lumentum (LITE-US) was once a top-performing AI-related stock at the beginning of the year. After two months of correction, investment bank Barclays believes the time to re-enter is now.

According to The Barron's, in a research report released on Monday (20th), Barclays upgraded Lumentum's rating from 'Hold' to 'Overweight' (Buy), while keeping its price target unchanged at $1,000.

Boosted by this positive news and a broad rally in AI hardware stocks, Lumentum's share price surged 4.5% on the day, closing at $765.55—making it the second-best performer among S&P 500 components that day.

Despite the strong rebound, Lumentum's stock remains down about 30% from its closing peak of $1,053.09 on May 11.

Looking back at its performance this year, Lumentum's shares soared nearly threefold from the start of the year to mid-May, primarily driven by NVIDIA's $2 billion investment and the company's strong earnings performance.

Investors had widely anticipated a rapid shift from copper cables to fiber-optic solutions for connecting AI chips and servers, benefiting Lumentum and peers like Coherent (COHR-US).

However, Barclays notes that the pace of this transition is now being questioned by the market. Capital has rotated into other AI supply chain bottlenecks such as memory and power chips, causing optical communications stocks to pull back.

On a price-to-earnings basis, Lumentum now trades at around 41 times its estimated earnings for the next 12 months—down significantly from the 62 times peak in early May. Coherent, meanwhile, trades at around 34 times.

Barclays analyst Tom O'Malley stated in the report that the fundamentals have not materially changed, and the current valuation makes optical stocks more attractive.

O'Malley highlighted that Lumentum's gross margin has improved by 13 percentage points over the past year, reaching approximately 48%.

He explained that the company's core product—laser components for optical communication modules—continues to command high pricing due to persistent supply shortages.

Regarding the highly anticipated 'Co-Packaged Optics' (CPO) technology—where chipmakers like NVIDIA integrate optical components directly into processor packages—Barclays acknowledged that while it was a hot topic earlier this year, widespread adoption may not occur until 2029 or 2030, later than expected.

Nonetheless, analysts argue this should not deter investors.

O'Malley emphasized that investors should currently view these companies as laser and optical transceiver module plays, with CPO becoming an incremental upside only by the end of the decade.

Barclays also reiterated its 'Overweight' rating on Coherent, maintaining a $350 price target. Coherent's stock rose 2.81% on Monday, closing at $285.40.