I last wrote about Lumentum ((LITE Quick QuoteLITE - Free Report) ) as the Bull of the Day on February 11 after the company delivered a very strong beat-and-raise quarter and shares launched to new highs near $600.

Since then, LITE as etched more new highs near $800. There have also been many exciting industry developments that suggest estimates for this maker of optical systems for NVIDIA ((NVDA Quick QuoteNVDA - Free Report) ) datacenter networking will keep going higher.

As I wrote in February, "The growth showcases the strength of the company’s plans for both optical components and systems in a world where NVIDIA is building next-gen GPU rack-scale datacenter architectures based on silicon photonics connectivity, switching, and networking." 

I also noted CEO Michael Hurlston's extreme optimism on the earnings call where he said... 

“Our forward guidance calls for over 85% year-over-year revenue growth, yet we are only at the starting line for two substantial opportunities: optical circuit switches (OCS) and co-packaged optics (CPO)."

CPO is the general category of lasers being built into the designs of NVIDIA GPU systems, or what Jensen calls "extreme co-design." OCS is a network device that establishes direct, physical paths of light between ports, allowing data to stay in the optical domain without Optical-Electrical-Optical (OEO) conversion.

OCS acts as a software-controlled reconfigurable fiber patch panel, reducing latency and power consumption in data centers and AI clusters by bypassing traditional electrical switches.

NVIDIA Locks Down All the Lasers

On March 2, Jensen & Co. announced $2 billion investment and partnership deals with both LITE and fellow laser leader Coherent ((COHR Quick QuoteCOHR - Free Report) ) to "advance the frontier" of advanced optics technologies, including manufacturing capacity and R&D, to enable next-generation AI infrastructure and systems designs.

The nonexclusive multiyear strategic agreement includes an NVIDIA multibillion purchase commitment and future capacity access rights for advanced laser components. In addition, NVIDIA is investing $2 billion in Lumentum to support R&D, future capacity and operations as the company builds out its U.S.-based manufacturing capabilities in a new fab.

“AI has reinvented computing and is driving the largest computing infrastructure buildout in history,” said Jensen Huang, founder and CEO of NVIDIA. “Together with Lumentum, NVIDIA is advancing the world’s most sophisticated silicon photonics to build the next generation of gigawatt-scale AI factories.”

“This multiyear strategic agreement reflects our shared commitment to advancing the optics technologies that will power the next generation of AI infrastructure,” said Michael Hurlston, CEO of Lumentum. “In support of this collaboration, we are also investing in a new fabrication facility to increase capacity and accelerate innovation. We’re excited to work together to expand what’s possible for the AI optical architectures of tomorrow.”

GTC + OFC = A Laser Light Show for the Newest Compute Bottleneck

The week of March 16 brought two big conferences for Lumentum and other optical industry players.

NVIDIA's GTC in San Jose unveiled new GPU system designs for the Vera Rubin platform and highlighted many of the optical technologies that will be included.

And the Optical Fiber Communications conference (OFC) in Los Angeles saw more detailed presentations by LITE, Coherent, and their peers and partners.

Lumentum gave a great overview of their business and the opportunities ahead at OFC in a 40-slide presentation. As optical components are becoming sold-out through 2027, they see market demand only continuing to expand.

>>Announced closing of deal to buy North Carolina chip plant from Qorvo; LITE will retrofit the facility to make indium phosphide-based optical devices, including continuous-wave and ultra-high-power (UHP) lasers for CPO.

Lumentum said it plans to invest hundreds of millions of dollars over the next several years in the 240,000-square-foot facility in Greensboro.

Besides NVIDIA, Lumentum said it also plans to support other AI infrastructure customers for their scale-out and scale-up optical requirements through the plant.

In their OFC presentation, LITE management revealed that when this new fab ramps up in early 2028, it will add a whopping $5 billion in annual revenue capacity at chip-level margins.

>>Lumentum officially targeting $2 billion in quarterly revenue, for an $8 billion annualized run rate. They laid out a timeline to hit $1.25 billion per quarter in the next 9 to 12 months, and then reach that $2 billion quarterly target in another 9 to 12 months. As they scale, they are targeting operating margins to expand to 38% to 42%.

Management announced a brand-new multi-year, multi-billion-dollar OCS agreement with a major hyperscaler. They already have a $400 million backlog to ship in the second half of this year, but with this new mega-deal, they project OCS will ramp to a greater than $1 billion run rate in 2027.

Lumentum is aggressively targeting the scale-up market (connectivity of GPUs withing racks) to replace copper. They noted that the first phase of this scale-up market will be 3X to 4X larger than the current scale-out market. 

To capture customers who don't have NVIDIA's massive optical engineering teams, they are building turnkey External Light Source (ELS) modules, which will actually double their revenue content compared to just selling bare lasers. They are also launching volume shipments of 1.6T transceivers in Q2, which carry significantly better margins.

Management showed a chart projecting the AI optical TAM (total addressable market) exploding from $18 billion today to over $90 billion by 2030. They are currently under-shipping customer demand by 25-30% and have customers asking for lasers in the billions of units.

Visible LITE Above $800?

In my February post-earnings article, when newly-raised Wall Street analyst price targets were gathering around the $550 level, I said "See ya next quarter when Lumentum surprises again and they raise their PTs to $650." 

That's already been happening, and then some, with these recent bumps...

Rosenblatt to $900 
Jefferies to $900
Craig Hallum to $900
Needham to $850
Northland to $775
Barclays to $750 (Hold)
Mizuho to $750
Cowen to $675 (Hold)

And on 3/23 after GTC and OFC, BNP Paribas analyst Karl Ackerman grabbed the Street-high target of $1040.

I still own shares from $350 and I'm not interested in selling. In fact, I hope I get another chance to add as I told my investors to do in March near $550.

Kevin Cook is a Senior Stock Strategist for Zacks Investment Research where he runs the TAZR Trader portfolio and holds shares of NVDA and LITE.