Citi: Citi raises Lumentum optical switching forecasts but takes a more cautious view of CPO ramp-up

What benchmarks does Citi expect near-term results to exceed?

Citi expects revenue and earnings per share for the quarter ending in September 2026 to each be about 2% above company guidance; its revenue and earnings-per-share forecasts for the quarter ending in December are 7% and 8% above market consensus, respectively.
The bank expects optical switching (OCS) revenue in the quarter ending in September to rise approximately 300% quarter over quarter to 200 million dollars, driving a 37% sequential increase in systems revenue; components revenue is expected to rise 22% quarter over quarter.
Citi believes demand still exceeded supply during the quarter, but supply expanded more than expected; among several growth businesses, OCS faced relatively fewer supply constraints.

Citi expects OCS revenue of 584 million dollars in the second half of 2026, above the company’s previous guidance of 400 million dollars and 17% above the bank’s prior forecast.
For fiscal years ending at the end of June, Citi raised its fiscal 2027 OCS revenue forecast from 1.4 billion dollars to 1.8 billion dollars and its fiscal 2028 forecast from 2.8 billion dollars to 3.7 billion dollars.
Order conversion and the acquisition of new large cloud customers will affect this growth trajectory; Citi is also watching for potential long-term supply-demand imbalances as competitors and Chinese EML suppliers rapidly expand capacity.

Citi is more cautious in its forecasts for near-packaged and co-packaged optics (NPO/CPO): although demand remains strong, the readiness of laser and GPU component supplies could lengthen the ramp-up cycle. The bank lowered its related fiscal 2028 AI revenue forecast from 1.4 billion dollars to 1.2 billion dollars.
The CPO model is based on Citi’s assumptions for Rubin shipments and assumes one external light source for every four GPUs, about 416 dollars of ultra-high-power lasers per light source, and Lumentum’s continued role as the primary supplier of lasers for Nvidia’s external light sources.
The increase in OCS forecasts and the reduction in NPO/CPO forecasts offset each other, leaving Citi’s overall revenue and earnings-per-share forecasts for fiscal 2027 and 2028 broadly unchanged.

Citi maintained its buy rating and 1400-dollar price target, based on forecast fiscal 2028 earnings per share of about 41 dollars and a price-to-earnings multiple of 35.
The bank said the 35-times price-to-earnings multiple represents a premium of about 10% to the average valuation of AI optics peers; it expects Lumentum’s earnings per share to grow at 2 to 3 times the pace of its peers from fiscal 2025 to fiscal 2028. Increased competition, AI demand being concentrated earlier than expected, or slower adoption of new products could affect this assessment.