2026-02-04 02:31Summary of J.P. Morgan's Optical Group Conference Call Industry Overview - The Optical group has shown resilience with a +10% performance year-to-date, outperforming the coverage average of -1% and the S&P 500 at +1% [1][3] - Concerns regarding AI valuations initially hindered growth, but strong fundamentals have emerged, supported by positive data points from December and January [1] Key Developments - Corning secured a $6 billion multi-year fiber optics agreement with Meta, indicating strong demand in the sector [1] - U.S. hyperscaler earnings and capital expenditure disclosures have been solid, contributing to an increase in market Total Addressable Market (TAM) expectations by over $5 billion for 2026 [1] Company-Specific Insights Coherent Corp (COHR) - Expected to report F2Q26 results ahead of expectations, driven by strong datacom and telecom trends [12] - Anticipated gross margin expansion, potentially reaching 40% or greater earlier than expected, supporting a bullish EPS outlook of ~$9 for CY27 [12][20] - Current share price trades at 28x CY27 earnings, below the cohort average of 30x+, presenting an attractive investment opportunity [12][20] Fabrinet (FN) - Positioned for upside in F2Q26 and F3Q26 results, driven by customer ramps in datacom, telecom, and HPC segments [15][30] - Anticipated revenue growth of +14% year-over-year for F3Q26, with a focus on Nvidia's ramp impacting overall performance [15][30] - Shares currently trade at 29x CY27 earnings, reflecting a modest discount compared to peers [15][30] Lumentum (LITE) - Facing a challenging setup with high buy-side expectations, trading at 36x CY27 earnings [16][42] - Expected revenue growth of +64% year-over-year for F2Q26, but concerns exist regarding the ability to meet lofty expectations [16][42] - The upcoming annual Investor Briefing may not provide significant updates on long-term financial frameworks, adding to uncertainty [16] Valuation and Price Targets - Coherent's price target set at $215, based on a P/E multiple of ~29x for CY27E EPS [21] - Fabrinet's price target set at $530, reflecting a target P/E multiple of ~30x [31] - Lumentum's price target set at $350, based on a ~30x P/E target multiple [43] Risks - Industry-wide pricing pressure could negatively impact earnings forecasts for optical component companies, including Coherent, Fabrinet, and Lumentum [23][35][45] - Vertical integration by optical system suppliers poses competitive risks, potentially leading to pricing pressures [25][48] - Customer concentration risks exist for all three companies, with significant revenue dependence on a few large customers [37][49] Conclusion - The Optical group is experiencing a rebound with strong fundamentals, but high valuations necessitate caution among investors. Selectivity is advised as companies navigate potential risks and pricing pressures in the optical component market [3][12][16]