Though certainly less well-known than the huge tech businesses that have prominently accounted for much of the market’s upward momentum in recent years, optical and photonics hardware manufacturer Lumentum (NASDAQ:LITE) has handily outperformed all of them over the last 12 months. With trailing returns of nearly 400 percent, Lumentum has surged to become one of the more exciting AI-adjacent stocks in the market today. Is Lumentum the best laser stock to buy now, and can LITE keep advancing in 2026?
What’s Behind Lumentum’s Rise?
Like many tech hardware stocks, Lumentum has surged on expected growth stemming from AI. Lumentum is a leading business in optical networking and ELS module production, both of which are critical components for the construction of the massive data centers that are being built to power artificial intelligence. Between the end of 2025 and the end of 2030, the number of data centers worldwide is expected to skyrocket from just over 6,100 to a little under 8,400. This not only creates immediate demand for Lumentum’s hardware but also gives it a potentially long and steep runway for future growth.
Data center demand has already translated to significant results at Lumentum. Fiscal Q1, which ended on September 27th, saw net revenues rise by 58.4 percent year-over-year to reach $533.8 million. Over the same time, gross margin expanded from 23.1 percent to 34.0 percent. Net income only reached $4.2 million, but it’s important to consider that the year-ago quarter saw Lumentum lose $82.4 million. On a non-GAAP basis, Lumentum reported net income of $86.4 million, up from $12.2 million in the year-ago quarter.
The long-term outlook for Lumentum, however, could be even more appealing. Lumentum’s own guidance for its next fiscal quarter to be reported calls for revenue of between $630 million and $670 million. Non-GAAP EPS, meanwhile, is expected to fall between $1.30 and $1.50, compared to $1.10 in fiscal Q1. With investment in data centers expected to be one of the defining characteristics of the tech industry for years to come, analysts are projecting Lumentum’s EPS to rise at a compounded annual rate of over 60 percent over the next few years.
Lumentum is also continuing to innovate and develop its portfolio of advanced photonics, an effort that could be a key driver of future growth. Lumentum recently showed off its most advanced photonics technology at the 2026 SPIE Photonics West show, highlighting cutting-edge laser and 3D sensing technologies. In addition to the growth of AI cloud computing, Lumentum’s technology will likely give it a large role in the future of high-precision manufacturing. Lumentum’s sensors are also widely used for automotive applications, a fact that could give it substantial upside as autonomous vehicle technology keeps improving.
Can Lumentum Sustain Its High Price?
Despite its considerable long-term promise, it’s difficult to ignore the extreme valuation that Lumentum currently commands. Shares of LITE are trading at over 250 times earnings and almost 15 times sales. It is worth noting, however, that Lumentum has only recently re-established profitability after a period of net losses that began in 2022. As such, Lumentum’s high P/E ratio could prove to be somewhat deceptive due to thin current profitability with significant room for expansion.
The question, therefore, is whether Lumentum can grow quickly enough to make its high price tag worthwhile. If the roughly 60 percent compounded EPS growth rate currently being projected for it holds, LITE would be priced at roughly 62 times its projected 3-year earnings and about 24 times its EPS in five years. At these prices, Lumentum could prove to be significantly overvalued if anything gets in the way of its growth.
LITE has also moved beyond what most analysts believe it is worth. Currently trading at $381.44, the stock has an implied downside of about 8.4 percent with a consensus price target of $348.38. Even so, analysts are still basically optimistic about the stock’s outlook, with Lite holding 12 buy ratings, five holds and no sell ratings. It’s also worth noting that the more bullish analyst forecasts still foresee considerable upside, as the highest price target for LITE is currently $500.
Is Lumentum a Buy Now?
Lumentum is a major force in a niche hardware category with rising demand created by AI and other cutting-edge technologies, a fact that puts considerable secular tailwinds behind it. As more and more data centers are constructed, demand for Lumentum’s optical networking hardware will likely experience steady upward pressure. The problem, however, is that with so much of its value predicated on long-term AI growth, Lumentum could be disproportionately exposed to the risk of an AI correction.
Investors are growing increasingly wary of the high valuations assigned to AI stocks, and it’s quite possible that AI CapEx from the major hyperscalers could peak by the end of this year. If market sentiment cools or investment slows, hardware stocks like Lumentum that have been bid up to enormous highs could face substantial downward volatility.
It’s also worth noting that Lumentum isn’t currently delivering the kind of high returns on assets, invested capital or equity that many investors would normally look for in a business commanding such a large valuation premium. While 12-month return on equity has been respectable at 12.3 percent, Lumentum’s ROIC has been just 3.1 percent over the same period. Return on assets has been even more modest at 2.7 percent. Although Lumentum handily beats its sector on all three metrics, these returns further indicate that almost all of LITE’s current valuation is based on very optimistic future growth expectations.
Taking all of this into account, Lumentum is likely a bit too expensive to buy after the blistering gains of the last 12 months. Despite a deeply positive outlook and strong secular trends supporting it, the price LITE is trading at demands years of best-case scenario results with very little room for either error or a slowdown in growth. As such, Lumentum may be a good stock to watch or hold, but most of its potential upside appears to have already been priced in.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.