Up 49% in 3 Months, This Magnificent Artificial Intelligence (AI) Stock Can Continue to Skyrocket

Key Points

• Lumentum is seeing fast-growing demand for optical networking components for AI data centers.

• The company's improving margin profile is driving a rapid improvement in its bottom line.

• Its earnings growth potential suggests that investors can expect more upside from this stock.

• 10 stocks we like better than Lumentum ›

Shares of Lumentum Holdings (NASDAQ: LITE) have been on a tear in the past three months, and that's not surprising as the company's growth has received a nice shot in the arm thanks to the rapid deployment of artificial intelligence (AI) infrastructure.

Lumentum sells optical and photonics components that are used for enabling high-speed data transmission in data centers and telecom networks. Its products are in hot demand as AI-focused data centers require high-speed networking to transfer large volumes of datasets for computation with minimal delay.

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Not surprisingly, Lumentum's latest quarterly results were fantastic. More importantly, its outlook tells us that this high-flying AI stock is built for more upside after jumping a solid 49% in the past three months.

Image source: Getty Images.

Lumentum is now growing at a terrific pace

Lumentum released its fiscal 2025 fourth-quarter results (for the three months ended June 28) on Aug. 12. Its fiscal 2025 revenue was up by 21% from the prior year. However, Q4 revenue increased at a significantly faster rate of 56% as compared to the year-ago period to $481 million.

Lumentum's terrific growth was powered by healthy demand for its components used in the cloud and networking segment, especially from hyperscale customers. Even better, the company's improving product mix and an increase in manufacturing utilization rates led to a remarkable increase in its margins.

Specifically, Lumentum reported a non-GAAP operating margin of 15% in fiscal Q4. That was a major turnaround over the negative reading of 5.1% in the same period last year. As a result, the company swung to an adjusted profit of $0.88 per share last quarter from a loss of $0.13 per share in the year-ago period.

Looking ahead, Lumentum is confident in sustaining its outstanding growth momentum. That's not surprising as the demand for its laser components deployed in high-speed optical networks, which are used in AI and cloud infrastructure, is outstripping supply. As it turns out, Lumentum ended the quarter with record orders and shipments for its advanced laser components and optical modules.

The expansion in Lumentum's order book can be attributed to the addition of a third hyperscale customer for its optical circuit switches. The company started recognizing revenue from its first two hyperscale customers in the previous quarter, and it looks like it has quickly added another customer for this product.

Even better, management reported that it has "just received the largest single purchase commitment in company history for our ultra-high power lasers." All this explains why Lumentum management is focused on adding more manufacturing capacity to satisfy the booming end-market demand, as it mentioned several times on the latest earnings conference call. However, Lumentum expects demand to remain stronger than supply in fiscal 2026 despite its capacity additions.

This should ideally foster a favorable pricing environment and allow the company to enjoy further margin gains. Moreover, the size of the optical transceivers and laser components market is expected to grow by 4x between 2024 and 2030, generating $20 billion in annual revenue at the end of the decade. Lumentum, therefore, seems to be sitting on a solid long-term growth opportunity.

Here's why investors can expect more upside

Lumentum has guided for $510 million to $540 million in revenue for the first quarter of fiscal 2026. That would translate into a 56% year-over-year increase at the midpoint. What's more, Lumentum management believes that it could achieve revenue of $600 million by the fourth quarter of the current fiscal year, suggesting that it is on track to maintain healthy growth levels.

We have already seen that Lumentum is witnessing rapid growth in its margins. Not surprisingly, analysts are expecting its bottom line to more than double in the current fiscal year from last year's level of $2.06 per share, followed by impressive gains over the next couple of years as well.

LITE EPS Estimates for Current Fiscal Year data by YCharts

Assuming Lumentum hits $7.11 per share in earnings in fiscal 2028 and trades at 30 times earnings at that time, in line with the tech-laden Nasdaq-100 index's forward earnings multiple, its stock price could jump to $213 in the next three years.

That points toward potential gains of 83% from current levels, which means that investors looking to buy a growth stock can still consider buying Lumentum as it has the potential to fly higher.

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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool recommends Lumentum. The Motley Fool has a disclosure policy.