Arm vs. Lumentum: Which Tech Stock Is a Better Buy in 2026?

As artificial intelligence (AI) pushes computing power and data transmission to new limits, investors are weighing different paths to growth. Is Arm Holdings (NASDAQ:ARM) or Lumentum Holdings (NASDAQ:LITE) the better choice today?

Arm creates the foundational blueprints for the world's most energy-efficient processors. Lumentum provides the optical components that allow data centers to communicate at lightning speeds. Both companies are central to the infrastructure of modern computing, but they operate with vastly different business models and financial profiles.

The case for Arm

Arm designs and licenses central processing units (CPUs) and other systems used in everything from smartphones to high-performance data centers. Rather than manufacturing chips, the company earns revenue through licensing fees and royalties on every chip sold. This model enables high scalability and profit margins in the semiconductor industry.

In fiscal 2026 (ending in March), Arm's revenue reached $4.9 billion. This represents growth of nearly 23% compared to the prior year. Net income was roughly $698 million, though the net margin decreased slightly from roughly 16% in the previous year to about 14%.

As of its June 2026 balance sheet, the debt-to-equity ratio is approximately 0.1x, indicating the company has very little debt relative to its net equity. The current ratio is roughly 5.3x, suggesting a strong ability to meet short-term financial obligations.

Trailing-12-month (TTM) free cash flow was $1.5 billion through the June quarter, but note that stock-based compensation represented roughly 69% of operating cash flow, which inflates reported cash generation since SBC is a non-cash expense added back in the cash flow statement.

The case for Lumentum

Lumentum manufactures optical and photonic products essential to cloud data centers and telecommunications networks. In its latest fiscal year ended June 27, 2026, Lumentum revealed that Customer A accounted for approximately 26.6% of revenue while Customer B accounted for roughly 15%. Customer concentration like this adds a layer of risk to the business, as the loss of either client would be significant.

For fiscal 2026, the company reported revenue of $3 billion, which was an increase of about 83% over the prior year. Despite this massive top-line growth, the company reported a net loss of approximately $6.9 billion, although its operating profit (earnings before interest and taxes) was $525 million. The $6.9 billion net loss was due to a $7.7 billion non-recurring loss on debt extinguishment.

According to its June 2026 balance sheet, the company has a debt-to-equity ratio of approximately 0.4x. The current ratio is nearly 1.7x, indicating about $1.70 in short-term assets for every $1.00 of short-term debt.

TTM free cash flow for the period was roughly $300 million. However, stock-based compensation accounted for roughly 22.7% of operating cash flow, inflating reported cash generation since SBC is a non-cash expense added back in the cash flow statement.

Risk profile comparison

Arm faces intense competition from established rivals and open-source alternatives. If major tech companies decide to design their own architectures rather than paying licensing fees, the company could see its market share erode. Additionally, the business relies on continued growth in the mobile and data center markets, and any slowdown in hardware upgrades would impact its royalty income.

Lumentum is highly dependent on a small number of customers for a significant portion of its sales, and many relationships lack long-term volume commitments. The company is also subject to complex trade policies and export controls, specifically regarding operations in China. Competition from global firms such as IPG Photonics and Viavi Solutions exerts constant pressure on pricing and operating margins.

Valuation comparison

Lumentum appears to be the more value-oriented choice as it trades at a significant discount to its peer across both sales and future earnings estimates.

Valuation metrics include those sourced from Financial Modeling Prep (FMP) and may differ from those of other data providers.

Which stock would I buy in 2026?

Arm is a great business that generates high margins from royalties and licensing fees. It would be a solid chip stock to own, but Lumentum offers better value right now.

Analysts expect Arm to grow earnings at a 25% annualized rate in the coming years. However, Lumentum is expected to deliver 132% annualized growth, as the business scales and expands margins. Relative to their forward price-to-earnings (P/E) ratios, Arm looks expensive, trading at a forward P/E-to-growth (PEG) ratio of 4.3x, while Lumentum trades at an attractive 0.29x.

Lumentum is benefiting from data centers shifting to optical connectivity for AI workloads. Revenue surged 109% year over year in the recent quarter, marking the eighth consecutive quarter of growth and signaling strong momentum that may not be fully reflected in the stock's valuation right now.

Arm is benefiting from the growing demand for CPUs, and its expertise in designing power-efficient chips could help it gain market share in the data center market.

Both companies are meeting demand at crucial chokepoints for AI, and they both face comparable risks. But it's difficult for me to pass up the huge discrepancy between each stock's PEG ratios. I would buy Lumentum since it's growing much faster than Arm and commands a much lower premium for future earnings growth.

John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Arm Holdings, Lumentum, and Viavi Solutions. The Motley Fool recommends IPG Photonics. The Motley Fool has a disclosure policy.