Stocks in motion: Luminating Lumentum’s acceleration

What does Lumentum do?

Lumentum is a leading supplier of lasers, optical transceivers, and photonic components. These products are essential for modern data centres, enabling faster, more power-efficient, and highly scalable data transmission.

The demand-supply imbalance

Generative AI workloads require large numbers of accelerator chips (high performance AI computing chips) to exchange data at very high bandwidth and low latency. This is driving high demand for networking infrastructure. Between now and 2035, network capacity is projected to grow at 40% compound annual growth rate [1].

In recent years, there has been a trend of moving from copper to optics in data centres because AI workloads need faster, longer connections. As bandwidth requirements increase, copper interconnects suffer from signal degradation, limiting the distance these can reliably transmit data. In contrast, optical links can carry data over longer distances more efficiently at high speeds and are not affected by electromagnetic interference. Lumentum, being one of the leaders in optical links, is able to capture this significant volume growth.

At the same time, the photonics industry is facing a severe bottleneck in the supply of the specialised lasers required to build these optical modules. Lumentum is under-shipping demand by roughly 30% [2] even though the company has significantly increased manufacturing capacity. As technology giants continue to announce new, massive data centre projects, the horizon for when supply might finally catch up to demand just keeps stretching further into the future.

The demand-supply imbalance also means that Lumentum’s target markets have been transformed. Historically reliant on the cyclical telecom market, Lumentum has successfully pivoted toward higher-margin cloud and data centre optics businesses. Furthermore, the extreme shortage of specialised lasers gives Lumentum notable pricing power, significantly improving its operating margins.

What are the risks?

The rapid pace of innovation poses an ongoing threat of technological obsolescence from emerging alternatives. Additional risk comes from any slowdown in the demand for data centres and consequently the supply shortage rapidly flips into overcapacity. There is also significant customer concentration. If any one of its customers fails to execute on their own plans, demand for Lumentum’s products will decline as well.

Lumentum’s role in the Global Equity portfolio?

Ultimately, Lumentum’s story is not just about lasers and data centres; it is a textbook example of sudden, dramatic corporate metamorphosis. In the framework of the corporate life cycle, businesses constantly evolve through phases. In fact, Lumentum's historical reliance on the cyclical telecom market initially flagged it as a default ‘Turnaround’ company in our Life Cycle framework. Yet, the sheer force of the artificial intelligence revolution and the sudden, emerging demand for its products have catapulted the company directly into an ‘Accelerating’ Life Cycle phase. For investors managing a diversified portfolio based on the corporate Life Cycle, we believe an Accelerating company like Lumentum serves a vital purpose. These are the rare engines that can provide the explosive sales momentum and true disruptive potential required to drive wealth creation.

References

[1] LightCounting and Lumentum, 2025

[2] Lumentum earnings transcripts, 2026

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