This Is Why LITE Stock Is My Newest Portfolio Bet

I just invested in a new AI stock that many people are considering expensive and already looking at selling. However, it's these moments in the market's history where they give you this sort of fear, uncertainty, and doubt in names that have clear opportunity. Yet, there's this moment in time whenever the market gives you opportunity to actually buy in at a much lower price than where we were potentially even just 2 weeks ago, like what we're about to show off in this name. What I'm talking about is Lumenum Holdings. Lummentum is a optics or photonix stock that is very focused on the hottest sectors in the networking and photonic spaces. We're talking about co-ackage optics, transceivers, many of the areas for which as we build out new data centers and also scale up existing data centers is the hottest area in the markets as many of these data centers are now transitioning from 800 Gbit per second optical cabling to now 1.6 6 terabs per second optical cabling, which is where we need to be for all of this data that's being sent between chips in data centers right now. What brought my attention to this stock was Nvidia, one of my favorite companies in the markets right now, that actually did a partnership with Lumenum specifically for their co-ackage optics, as well as investing $2 billion into this company. They also included a multi-billion dollar purchase commitment for future capacity access rights for advanced laser components. Now, as we go through, Lumenum is a much smaller company than many of the other names in the space, like Coherent, for example. But Lumenum is focused on a very hot product mix, specifically things like co-ackage optics or CPO, where Lumenum is working with Nvidia for things like their Spectrum X switches. This is leading to explosive growth at over 90% year-over-year right now, which by the way, the growth is also accelerating. Before this was just under 20% growth year-over-year to now 90%. And not only that, we're expected that this growth continues and that they make more money every quarter and that the growth is even accelerating even further. But due to the product mix that Lumenum actually has, many of the products that customers are asking for like Nvidia or Google as well, Lumenum doesn't even have the supply available to actually give their customers as much as what they're asking for. And so what you end up seeing is that the gross margin, the profitability of each product that they're selling is climbing drastically. And you can really see a big tick up quarter over quarter. And that's expected to happen while this demand cycle actually remains tighter than it was even just last quarter. This is what Lmentum CEO just said. We're actually stepping up our supply in a pretty significant way. That being said, as we've said kind of over and over, we continue to lag demand. The supply demand imbalance is probably even higher than it was reported on our last call, somewhere greater than 30%. I think last time we said this metric is around 25 to 30%. We seem to still be behind significantly. Now, unlike the memory bottlenecks, which I've covered before, the average selling price of memory has been climbing drastically, but the actual supply of memory that they're selling has not gone up because new fabrications have not come online. This is not the same with Lentum in the rest of the optics plays. The supply is going up but the demand is still outstripping it. So they are actually selling more and the prices are going up and yet they still cannot satisfy demand. Now this is leading to real profitability and that's expected to happen as we see more and more of these quarters. Not only are we going to stay profitable but the margins are going to climb as well. And just look at this cash from operating activities. We essentially went from year-over-year from negative $1.6 6 million to $23 million. Essentially doubling what seems like every couple of quarters here. And that's looking to continue. Maybe not at that rate, but as a continuous amount of overall cash from operations, that's going to climb higher. And they're taking this cash and they're building out more fabrications. So then they can end up increasing that supply even further because they believe that there's a long runway of continuous need of not only more data centers which is scale out but also the data centers that exist are only going to get better and better. So we need scaling up the cost in the average margin per data center for networking revenue is going to climb. Not only retrofitting old data centers but the data centers of the future are going to spend more on optics than they have in the past. So, they need more fabrications so then they can get out more products over time. And you're seeing them actually do this. In an 18-month period, they've been able to double their chip unit capacity. And yet, they're still behind on overall demand versus what they have in supply. So, they continue to spend and you're going to see capex continue to increase, but this is not necessarily a capital-heavy business. It's just this is what they need. As average selling prices increase and margins increase, they're perfectly happy to make these investments. So capex for the last two quarters in a row have essentially doubled from their year-over-year comparisons, which by the way we're going to see continue to happen as we spent even less money in Q2 than we did in Q1 for Capex. This time around it's not going to be that way due to those deals like what we saw with Nvidia. Large amounts of capital being flown into the business, 2 billion extra dollars, right? more capital to build more fabs and then also large purchase agreements from Nvidia saying essentially you are going to have demand for a long time. So we give you a ton of runway to build out new fabs and increased supply. So although capex is increasing free cash flow continues to climb up because that cash from operations is skyrocketing. So free cash flow margin and free cash flow is also climbing which is very good. But like I said, their cash pile did increase and you can see this here, massive increase, which is mainly due to that Nvidia investment. Now, one of the ways to judge a company's performance is their rule of 40. This is a combination of both their revenue, but also their adjusted EBIDA margin, which is how I'm looking at this rule of 40, which is now sitting at over 126 times or 126% as a combined growth and margin rate. The rule of 40 is called that because it's a very comfortable level of growth specifically for SAS names, which Lumenum is not. But it doesn't matter whether you have 10% growth and 30% margins or 30% growth and 10% margins. It's a comfortable place to be at. Well, what if you're more than three times the normal growth rate and margin profile? You start to look at a very, very successful company. one that continues to expand their inventories, which I've seen people online essentially say, "Hey, well, why are you increasing your inventories if the supply demand is so imbalanced, but if you actually look at this in terms of the inventory verse their amount of revenue, you actually see it decrease over time. So, they are getting tighter in their total supply. And with some of the areas of their overall growth, which these are a little bit outpaced already because we're actually seeing more growth than what was initially expected, especially both on the data center side and on the optical lane growth as well. But still looking the fact that this is almost 2.2 times faster than how much the total power generation is actually going to be needed. It's these types of bottlenecks over energy that get me really excited because you're seeing both that scale out and scale up growth happening at the exact same time. And this is likely to continue to happen as there's many innovations all the way out to 2028 so far where they continue to make these step ups in performance going from CPO generation 1 all the way to CPO generation 2 and beyond as we start to go from copper cables all the way to optical scaleup solutions that essentially are making the data centers more efficient and you're going to be paying Lentum more than previous companies that have dealt with those solutions. Now, Serenity Online essentially showed off this CPO total addressable market of what they believe is going to happen between 2026 all the way to 2028, specifically for the CPO market. And if you end up looking, they predict roughly a $91 billion total addressable market for CPO going by the end of 2028. If we are in the early stages of this and as we get later on we get newer generations of CPO, we get scaled up data centers, we also get new data centers. This amount of money that currently Lum is making is nowhere near where we're going to be by the end of it. Even though stocks rise on potential bottlenecks, Lumenum is down roughly about 25% from its all-time high. There's these quick sell-offs that have happened due to semi analysis reports on delays even though they then turned around and started an ETF laser and then entering into these types of markets. It's interesting to see that there's a lot of fear, uncertainty, and doubt that can bring these companies down only to then show that the growth is only going to continue. Data centers continue to be built out. Grock 4.5, OpenAI, Enthropic, and now Muse Spark 1.1 are all showing significant advancements in their overall model efficiencies. And we are going to need more data centers for that. So I don't want to just play one area. I'm not just playing co- package optics. I'm not just playing memory. I'm not just playing the chip names. I'm playing all of them. Nvidia, Micron, Broadcom, Lum, the list goes on and on. But this is the area that I want to invest in going forward. Let me know what you guys think about this optics play. Am I too late or am I just in time for the really big ascension in some of these stocks? Thank you so much for watching. Really do appreciate your time. Make sure you subscribe. Bye-bye for now.