The bullish case for Lumentum Holdings Inc (NASDAQ: LITE) has come to an end, and the company needs to outperform in the 3D market for further sustainable growth, according to Morgan Stanley.
Meta Marshall downgraded Lumentum from Overweight to Equal-weight with a price target lifted from $65 to $68.
Morgan Stanley turned bullish on Lumentum in March and said at the time that the company wasn't receiving enough credit for the synergy potential of its late 2018 acquisition of Oclaro, Marshall said in a Monday downgrade note. (See her track record here.)
Other bullish factors at the time included a growing, diverse product mix and 3D sensing estimates that were mostly derisked, the analyst said.
For the most part, the bullish stance played out over the months, as operating margins are around 300 to 400 basis points higher year-over-year since the Oclaro acquisition closed, she said.
The 3D sensing business is performing better than expected so far in 2019, as management fixed inventory issues, Marshall said.
Now that Lumentum's stock is trading near 52-week highs, its valuation is "about fair," the analyst said.
Specifically, shares are trading at 13.1 EV/NTM P/E, which is a premium to the one year-average of 11.5 — although far removed from the five-year average of 30 times.
Looking forward, the stock's multiple could expand further if iPhone enthusiasm "picks up" in the middle of 2020 from a "world facing 3D sensor module," Marshall said.
Until then, the stock's trading range will be relatively limited, with downside risk if demand from China or the impact from the trade war worsen, she said.
"Overall, we believe the time to own LITE is in the spring to early fall, getting out of the same ahead of when supply chain names get affected by Apple estimates heading into the end of 2020."
Lumentum shares were down 1.8% at $65.32 at the time of publication.