Evercore ISI: Reported Lumentum acquisition talks put optical communications demand and capacity delivery in focus

What questions does the reported acquisition raise?

According to Bloomberg, Marvell is in advanced talks to acquire Lumentum, with a deal potentially announced as soon as next week; terms had not been disclosed at the time. Lumentum plans to release earnings on 5 November.
Investors are asking why Lumentum would sell now after saying its capacity was sold out through fiscal 2029. With more than 17% of its revenue coming from China, whether the deal would require approval from Chinese market regulators is another question.
Customer reactions and the competitive landscape are also in focus. The report mentions Alphabet, Ciena and Nvidia, which holds a stake in Lumentum; Nvidia contributes less than 10% of revenue.

Evercore ISI expects a strong fiscal first quarter of 2027 ending in September 2026, supported by continued demand for optical devices, capacity expansion and a ramp-up in optical circuit switch shipments. The market expects quarterly revenue of 1.25 billion dollars and earnings per share of 4.21 dollars, within the company’s respective guidance ranges of 1.225 billion to 1.275 billion dollars and 4.05 to 4.35 dollars.
The company previously guided for its first quarter with optical circuit switch revenue exceeding 100 million dollars; shipments had doubled sequentially in the preceding quarter ended in June. Management also said demand for the product accelerated after the last earnings call.
For laser chips, the company plans to increase EML shipments by more than 50% by December. By mid-2027, single-channel 200G products are expected to account for most EML shipments, and a higher share of higher-value products is expected to drive margin expansion.

Evercore ISI believes AI data-center connections—from within racks and between clusters to between data centers—are increasing the use of optical devices. Lumentum supplies laser chips, external light-source modules, optical circuit switches and coherent communications components, so its growth does not rely on a single product or customer cycle.
Management expects the total addressable market for optical communications in AI to approach 90 billion dollars by 2030. Evercore ISI estimates that connections between clusters account for about 48 billion dollars, connections within racks about 22 billion dollars, and optical circuit switches and data-center interconnects about 10 billion dollars each.
The firm believes the company’s previous long-term financial framework has become outdated in light of current demand. The CEO recently said fiscal 2028 earnings capacity could reach 40 dollars per share.

The keys are the timing of capacity expansion and customer qualification, whether product pricing can hold, customer demand for and diversity of optical circuit switches, and whether margins can continue to improve as higher-value products scale.
Constraints listed by Evercore ISI include slower capital spending by cloud providers, concentration among major customers, factory expansion execution and yields, competitive pricing pressure, and regulatory risk. The firm maintains its Outperform rating and 1500-dollar price target.