Homepage / Technology / If Tim Cook is right about AR, Lumentum is a buy
Amazon says this Prime Day was its biggest shopping event ever Kudlow says President Trump is 'so dissatisfied' with China trade talks that he is keeping the pressure on As stocks regain their footing, an ominous warning looms Goldman Sachs downgrades Clorox to sell, says valuation is 'unsustainably high' How Satya Nadella has spurred a tripling of Microsoft's stock price in just over four years Kudlow says economic growth could top 4% for 'a quarter or two,' more tax cuts could be coming The one chart that explains Netflix’s stunning comeback US housing starts plunge 12% in June to a nine-month low Aerospace titans Boeing and Airbus top $110 billion in orders at Farnborough Target uses Prime Day to its advantage, logging its 'biggest online shopping day' so far this year Billionaire Marc Lasry sees bitcoin reaching up to $40,000 as it becomes more mainstream and easier to trade These are the 10 US airports where you're most likely to be hacked Amazon shares slightly higher as investors await Prime Day results Wreck of Russian warship found, believed to hold gold worth $130 billion A bullish ‘phenomenon’ in bond market is weeks away from fading, top credit strategist says Stocks making the biggest moves premarket: MS, GOOGL, TXN, UAL, NFLX & more Twitter shares up 50% since late April means most upside priced in, analyst says in downgrade EU fines Google $5 billion over Android antitrust abuse Mortgage applications fall 2.5% as buyers struggle to find affordable homes America may not have the tools to counter the next financial crisis, warn Bernanke, Geithner and Paulson Investors are getting spooked as the risk of a no-deal Brexit rises EU expected to fine Google $5 billion over Android antitrust abuse Ex-FBI chief James Comey urges Americans to vote for Democrats in midterm elections Elon Musk apologizes to British cave diver following baseless 'pedo guy' claim Disney, Comcast and Fox: All you need to know about one of the biggest media battles ever Xiaomi shares notch new high after Hong Kong, mainland China stock exchanges reach agreement The trade war is complicating China's efforts to fix its economy European markets set for a strong open amid earnings; Google in focus Hedge fund billionaire Einhorn places sixth in major poker tournament The biggest spender of political ads on Facebook? President Trump Asian stocks poised to gain after Fed's Powell gives upbeat comments; dollar firmer Stocks are setting up to break to new highs Not all FAANG stocks are created equal EU ruling may be too little, too late to stop Google's mobile dominance Cramer explains how Netflix's stock managed to taper its drop after disappointing on earnings Airbnb condemns New York City's 'bellhop politics,' threatens legal retaliation Amazon sellers say they were unfairly suspended right before Prime Day, and now have two bad choices Investor explains why 'duller' tech stocks can have better returns than 'high-flying' tech names Elon Musk is 'thin-skinned and short-tempered,' says tech VC Texas Instruments CEO Brian Crutcher resigns for violating code of conduct Google Cloud Platform fixes issues that took down Spotify, Snapchat and other popular sites Uber exec: We want to become the 'one stop' transportation app 'What a dumb hearing,' says Democrat as Congress grills tech companies on conservative bias Amazon shares rebound, report says Prime Day sales jumped 89 percent in first 12 hours of the event How to put your medical history on your iPhone in less than 5 minutes Investment chief: Watch these two big events in 2018 Even with Netflix slowing, the market rally is likely not over Cramer: Netflix subscriber weakness debunks the 'sky's the limit' theory on the stock Netflix is looking at watch time as a new area of growth, but the competition is stiff Why Nobel laureate Richard Thaler follows Warren Buffett's advice to avoid bitcoin Rolls-Royce is developing tiny 'cockroach' robots to crawl in and fix airplane engines After Netflix plunge, Wall Street analysts forecast just tame returns ahead for the once high-flying FANG group Roku shares rise after analyst raises streaming video company's price target due to customer growth China is investing 9 times more into Europe than into North America, report reveals Amazon says US Prime Day sales 'so far bigger than ever' as glitch is resolved Netflix is on pace for its worst day in two years US lumber producers see huge opportunity, rush to expand San Francisco to consider tax on companies to help homeless Homebuilder sentiment, still high, stalls as tariffs, labor and land drive up costs Powell backs more rate hikes as economy growing 'considerably stronger' Netflix history is filled with big stock declines – like today – followed by bigger rebounds Intel shares get downgraded by Evercore ISI due to rising competition from Nvidia, AMD Petco aims to reinvent the pet store with something you can't buy online Genetic testing is coming of age, but for consumers it's buyer beware Tech 'FAANG' was the most-crowded trade in the world heading into the Netflix implosion, survey shows Netflix weak subscriber growth may indicate a 'maturity wall' that could whack the stock even more: Analyst This chart may be predicting the bull market's demise Wall Street says Netflix's stock plunge is a ‘compelling’ buying opportunity because the streaming giant ‘never misses twice’ Tesla sinks after Musk tweets, again Boeing announces new division devoted to flying taxis Stocks making the biggest move premarket: NFLX, UNH, GS, AMZN, WMT & more Deutsche Bank downgrades Netflix, but says big subscriber miss is not 'thesis changing' IBM is experimenting with a cryptocurrency that’s pegged to the US dollar North Korea and Zimbabwe: A friendship explained Virgin Galactic spinoff Orbit to launch rockets from the UK with space deal Artificial intelligence will create more jobs than it destroys? That’s what PwC says ‘Treasonous’ Trump and ‘Putin’s poodle:' Scathing headlines follow the Trump-Putin summit China’s fintech companies offer ‘enormous’ opportunity, investment manager says Trump's performance at summit with Putin was 'unprecedented,' experts say Walmart and Microsoft link up on cloud technology as they both battle Amazon European stocks seen mixed amid earnings; Fed’s Powell to address Congress How I knew I should quit my day job and run my start-up full-time: Viral website founder China's stocks have been trounced, but the trade war may ultimately be good news for those shares Billionaire tech investor Peter Thiel bets on crypto start-up Block.one Asian shares subdued open after mixed close on Wall Street; energy stocks under pressure Amazon cloud hits snags after Amazon Prime Day downtime Netflix isn't doomed by one quarter unless people start questioning the long-term investor thesis Tech stocks set to sink on Tuesday after rough evening for ‘FANG’ Netflix plummets after missing big on subscriber growth This wristband lets humans control machines with their minds The U.S. has a rocky history convincing Russia to extradite computer criminals Amazon suffers glitches at the start of Prime Day Jeff Bezos is now the richest man in modern history 'The United States has been foolish': Read Trump and Putin's full exchange Goldman Sachs recommends these 5 highly profitable companies — including Nvidia — to combat rising inflation Goldman Sachs releases 'tactical' stock picks for this earnings season Three red flags for Netflix ahead of its earnings report The bond market may be raising recession fears, but don't expect one anytime soon Cramer: Banks are 'making fortunes' but are still as hated as they were during the financial crisis Putin told Trump at summit: Russia never meddled in US election

Technology

If Tim Cook is right about AR, Lumentum is a buy

“I do think that a significant portion of the population of developed countries, and eventually all countries, will have AR experiences every day, almost like eating three meals a day, it will become that much a part of you,” said Tim Cook, CEO of Apple in 2016.

If Tim Cook is right, then Lumentum should be one of the hottest technology companies of the next year. So the question is: Is Tim Cook right? I think he is and you should too. Here’s why.

If Apple, the most valuable company in the world, is talking about Augmented Reality as the next great computing platform, then the companies that provide the technology to make this possible will be great investments.

Tune into Squawk Alley at 11 am. Dan Niles will be a guest.

Fast forward about a year to November 3, 2017 when the iPhoneX went on sale in retail stores worldwide. The big new feature is FaceID, which enabled users to unlock their iPhones using just their face which means remembering 50 different usernames and passwords is on the verge of becoming a relic of the past. And if that isn’t enough to get you excited, it won’t be long before augmented reality capabilities allow users to see digital images overlaid onto the physical world.

Want to be able to try on clothes in the digital world and then order them in the real world? Interested in seeing dragons in your living room? What if the dragons could race or battle? The possibilities are endless and coming your way in the near future compliments of the 3D sensing technology that is powered by lasers and built by – you guessed it – Lumentum.

Like most technologies, 3D sensing technology was developed many years ago. In 2010, JDSU Uniphase (the parent company of Lumentum) provided this laser technology for the Microsoft Kinect. It was a motion sensing input device for the Xbox 360 that would mimic your actions in the video games.

For example, one player could pretend to throw a fastball and the other player could pretend to hit it with characters on the screen mimicking the actions. There was no need to hold a controller like with the Wii. Having sold 8 million units in its first 60 days on the market, Kinect claimed the Guinness World Record of being the “fastest selling consumer electronics device.” The high initial price, among other factors, eventually led to its demise. But times and technology costs change.

So how big could revenues from the 3D sensing market be? Each complete 3D Sensing module is currently over $10 with the laser content around $4. There are 1.5 billion smartphones sold worldwide each year. But by 2019, we are likely to get a world facing 3D camera. This world facing camera’s laser will have to be stronger and as a result more expensive given it will be scanning your environment and not just your face.

To put this opportunity in perspective, Lumentum had less than $1 billion in revenues over the past twelve months. The revenue from the smartphone market alone should easily be above $10 billion over time even with normal price declines in the technology. Beyond 2019, this technology is likely to expand into other large markets requiring precise depth sensing such as industrial robotics and eventually self-driving automobiles.

So what are the companies that benefit from the ramp in 3D sensing technologies? There are many involved in making 3D sensing a reality. Here are some examples: Aixtron is the primary supplier of the deposition tools used for manufacturing the epitaxial wafers on which the lasers are built; IQE uses these tools to manufacturer the wafers that are supplied to the laser manufacturers; WIN Semiconductors manufactures the lasers on the wafers; Himax is collaborating with Qualcomm to make a 3D camera system for the China Android phones and uses the same laser supplier as Apple; ams AG supplies advanced optics to project the laser light onto the subject; STMicro supplies the image sensors to process the reflected laser light from the subject; and finally, LG Innotek combines all the components into a module.

But who actually designs the lasers for Apple without which none of these other companies would be seeing that demand? That would be Lumentum which has over 90 percent market share with Apple for 3D lasers.

3D sensing is going to be huge for Lumentum. It is a reinvention of the company. Lumentum will see their revenues related to Apple go from essentially zero in the first quarter of 2017 to at least $145 million in the last quarter of 2017 based on their guidance. In nine months, Apple will have gone from 0 percent to 40 percent of Lumentum’s total revenues. The impact of 3D lasers on Lumentum as a percent of revenues is higher than for any of the other companies mentioned above.

So why has Lumentum’s stock dramatically underperformed its 3D sensing peers? Lumentum’s historical business of manufacturing optical modules for the telecom industry has been in a horrible decline over the past year. Lumentum’s revenue from China has been cut in half from the peak and demand from US telecom carriers has also been weak given all of the merger activity over the past year.

As a result, Lumentum’s optical communication revenue was down 22 percent year-over-year in the September quarter helping to drive a nearly 30 percent decline in the stock price from its recent peak. As a result, Lumentum’s stock is up only 22 percent this year versus gains of 70 percent to over 300 percent for their 3D sensing peers.

This has created the buying opportunity in Lumentum’s stock. We think it is only a matter of time before Lumentum’s stock comes roaring back as 3D technology proliferates across the technology landscape in 2018 and the telecom business stabilizes and recovers.

So a company with this type of potential must be expensive, correct? Wrong! Because of the steep declines in their historical optical business, Lumentum trades only at a price-to-earnings (PE) ratio of 12 times. The stock seems extremely cheap compared to the other companies in the 3D sensing space. Closely related companies, Win Semiconductor which manufactures the lasers for Lumentum trades at 23 times 2018 earnings and IQE which supplies the epitaxial wafers on which these lasers are manufactured trades at 38 times.

We believe in 2018, Apple will also expand this technology to iPads which sell over 40 million units each year. The Chinese smartphone vendors will also introduce their own 3D sensing enabled smartphones in 2018. Lumentum already has orders in hand from one of these vendors.

As 3D technology expands from just the iPhone X, to iPads, Android Phones and multiple 3D cameras per phone, we think overall Lumentum revenues could be up even more than current expectations for 29 percent revenue growth in 2018 and 64 percent earnings growth.

We think there is an even bigger disparity in 2019 between current expectations and reality. Wall Street expects Lumentum’s revenue growth to slow to 5 percent in 2019 and earnings growth to slow to 11 percent. But by 2019, the Android smartphone vendors which are over 80 percent of the units in the global market will start to catch up with Apple in adding 3D sensing features to the phone. Also Apple will have added a world facing 3D camera by this point doubling the number of lasers per phone.

In conclusion, as we eagerly await Luke Skywalker powering up his light saber once again, remember that lasers are not just for Jedis anymore and the technology will be coming to a phone near you. May Lumentum be with you.

Commentary by Dan Niles, founding partner of AlphaOne Capital Partners and senior portfolio manager of the AlphaOne Satori Fund. Previously, he was a managing director at Neuberger Berman, a subsidiary of Lehman Brothers.

Disclosures: This material is presented solely for informational purposes and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. Readers should not assume that any investments in securities, companies, sectors or markets identified and described were or will be profitable. This material has been prepared by AlphaOne Capital Partners, LLC on the basis of publicly available information, internally developed data and other third party sources believed to be reliable. AlphaOne Capital Partners, LLC has not sought to independently verify information taken from public and third party sources and does not make any representation or warranty as to the accuracy, completeness or reliability of the information contained herein. All information is current as of the date of this material and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Certain products and services may not be available in all jurisdictions or to all client types. Investing entails risks, including possible loss of principal.

The views expressed are those of Mr. Niles and do not represent the views of AlphaOne Capital Partners, LLC, its portfolio managers, employees or affiliates. These views are current as of the time of this presentation and are subject to change without notice. This material is not intended to be a formal research report or recommendation and should not be construed as an offer to sell or the solicitation of an offer to buy any security. AlphaOne Capital Partners, LLC and its clients may have long or short positions in some or all of the securities discussed. Before acting on any advice or recommendation in this material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Mr. Niles does not accept any responsibility to update any opinions or other information contained in this document. Before acting on any advice, opinions or recommendation in this material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice.

For more insight from CNBC contributors, follow @CNBCopinion on Twitter.

Source: Tech CNBC
If Tim Cook is right about AR, Lumentum is a buy

Comments are closed.