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Lumentum Holdings Inc. shares dropped toward their lowest closing price since 2019 on Thursday amid concerns that inventory backups that have plagued different sectors of tech have spread to the telecommunications industry.
Lumentum
LITE,
shares dropped nearly 12% to an intraday low of $45.33 Thursday, a day after the company said it would miss revenue projections because of a large order cancellation. That was the lowest intraday price since June of 2019, according to FactSet records, and Lumentum was headed for its first closing price lower than $50 since October of 2019.
Rosenblatt Securities analyst Mike Genovese downgraded Lumentum to neutral from a buy, and dropped his price target on the stock to $48 from $77, as telecom inventory problems appear to have become the “latest shoe to drop” in the continuing component glut plaguing the tech industry.
While Lumentum did not specifically identify the customer that slashed its regular order, the hint that it was a 10%+ customer leads Genovese to believe the cancellation was from telecom-network company Ciena Corp.
CIEN,
Read: Ciena’s stock pares losses as company reiterates forecast after Lumentum warning
“In our view, Ciena FY23 inventory reduction was expected, but this happened much quicker than expected,” Genovese said. “We believe one of the reasons for the seemingly sudden cuts is that Ciena, along with many other vendors in the supply chain, saw order push-outs from hyperscalers in March.”
“Hyperscalers” are an industry term for cloud-service providers like Microsoft Corp.’s
MSFT,
Azure, Amazon.com Inc.’s
AMZN,
AWS, Alphabet Inc.’s
GOOG,
GOOGL,
Google Cloud Platform, and Oracle Corp.’s
ORCL,
Cloud Infrastructure. While rising technologies like AI are expected to boost growth at hyperscalers, some analysts aren’t seeing that growth spurt in the short term, and that’s creating inventory backups in such areas as memory chips.
Genovese is also concerned about Lumentum’s 3DS business, which sells 3-D sensing components used in augmented-reality systems and automobiles.
“We also believe there may be more bad news ahead in the Consumer 3DS market for Lumentum, as the relationship with Apple Inc.
AAPL,
[rated by Rosenblatt as a buy] has deteriorated,” Genovese said. “The 3DS competition has gotten stronger, and there are more competitors and potential competitors than before.”
Given that, Genovese said he leans toward those companies that aren’t exposed to hyperscalers “on any weakness,” recommending buy-rated stocks such as Extreme Networks Inc.
EXTR,
Calix Inc.
CALX,
and Adtran Holdings Inc.
ADTN,
Lumentum shares have fallen 49% over the past 12 months, compared with an 8% drop on the S&P 500 index
SPX,
and a 13% decline on the tech-heavy Nasdaq Composite Index
COMP,
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