• Investors may be wondering if Lumentum Holdings at around US$854.96 is still offering value after its big run, or if the easy money has already been made.
• The stock is up 121.4% year to date, with a very large 1 year return and a multi year gain of more than 7x, even though it has fallen 9.7% over the past week and is down 0.4% over the past month.
• Recent attention on Lumentum Holdings has been driven by its share price performance and the broader interest in evaluating high growth tech stocks. This has increased the focus on whether current prices are supported by fundamentals and what different valuation tools are indicating.
• Lumentum Holdings currently has a valuation score of 4 out of 6. Next you will see how different valuation approaches line up with that score, along with a perspective later in the article on an even richer way to think about what the stock might be worth.

Approach 1: Lumentum Holdings Discounted Cash Flow (DCF) Analysis

A Discounted Cash Flow, or DCF, model estimates what a stock could be worth by projecting the company’s future cash flows and discounting them back to today using a required return. It is essentially putting a present value on the cash the business is expected to generate for shareholders.

For Lumentum Holdings, the model uses a 2 Stage Free Cash Flow to Equity approach. The latest twelve month free cash flow is about $135.9 million. Analysts provide explicit free cash flow estimates for the next few years, then Simply Wall St extrapolates further out, with projections such as around $2.7 billion of free cash flow in 2028 and further estimates out to 2035. All these projected cash flows are discounted back to today in dollars.

On this basis, the DCF model points to an estimated intrinsic value of about $1,510 per share. Compared with the current share price of around $854.96, the model suggests an implied discount of roughly 43.4%. Under this method the stock screens as undervalued.

Result: UNDERVALUED

Our Discounted Cash Flow (DCF) analysis suggests Lumentum Holdings is undervalued by 43.4%. Track this in your watchlist or portfolio, or discover 46 more high quality undervalued stocks.

Approach 2: Lumentum Holdings Price vs Sales

For profitable companies where revenue is a key driver, the P/S ratio can be a useful way to think about value because it compares what you pay for each dollar of sales with what the business is currently generating.

In general, higher growth expectations and lower perceived risk can justify a higher “normal” or “fair” multiple, while slower expected growth or higher risk usually point to a lower one. That context is important when you compare Lumentum Holdings with its sector.

Lumentum Holdings is trading on a P/S of about 26.73x. This sits well above the Communications industry average of about 2.65x and also above the peer group average of around 13.44x. Simply Wall St’s “Fair Ratio” for Lumentum Holdings is 40.45x, which is a proprietary estimate of what the P/S multiple could be given factors such as earnings growth, profit margins, industry, market cap and risk profile.

Because the Fair Ratio is tailored to the company’s own characteristics rather than just broad comparisons, it can offer a more rounded view than simply lining the stock up against peers or the wider industry. Here, the current 26.73x P/S sits below the 40.45x Fair Ratio, which indicates that the stock appears undervalued on this metric.

Result: UNDERVALUED

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Upgrade Your Decision Making: Choose your Lumentum Holdings Narrative

Earlier the article highlighted that there is an even better way to understand valuation, and Narratives are that tool, because they let you link your view of Lumentum Holdings' story to specific assumptions about future revenue, earnings, margins and a fair value, then continually compare that fair value with the live share price on Simply Wall St's Community page.

Instead of only relying on a single P/E or DCF output, you can select or create a Narrative that matches how you see the company. That might look closer to the more optimistic fair value around US$1,033.69, the more cautious view near US$433.09, or the analyst consensus of US$1,104.68. You can then see how those different stories translate into distinct forecasts and valuation ranges.

Because Narratives are refreshed when new earnings, guidance or news such as the Nvidia agreements are added to the platform, you can quickly see how your chosen Lumentum Holdings Narrative shifts over time. You can then use the gap between its evolving fair value and the current market price as one input into deciding whether the stock now looks more attractive, more fully priced, or closer to your own estimate of fair value.

For Lumentum Holdings, however, we will make it really easy for you with previews of two leading Lumentum Holdings Narratives:

Fair value in this bullish Narrative: about US$1,104.68 per share.

At the recent price of about US$854.96, this view implies the stock is trading roughly 22.6% below that fair value estimate.

Revenue growth assumption: 67.40% a year.

• Analysts expect very rapid revenue and earnings growth over the next few years, supported by AI, cloud and data center demand for advanced optical components.
• Higher margins are built into the story, helped by capacity expansion, product mix and pricing on constrained high value products.
• The key risks are revenue concentration in a handful of hyperscale customers, execution on new capacity and the potential impact of competition and geopolitics on margins and supply chains.

Fair value in this more cautious Narrative: about US$433.09 per share.

At the same US$854.96 share price, this view implies the stock is trading roughly 49.3% above that fair value estimate.

Revenue growth assumption: 38.57% a year.

• This Narrative leans on the idea that dependence on a few large cloud customers, rapid technology shifts and potential commoditisation of optics could cap profitability.
• It also factors in possible pressure on pricing and margins from concentrated buyer power, global supply chain complexity and new lower cost competitors.
• Upside risks to this cautious view include faster AI and cloud adoption, strong positions in higher margin products like optical circuit switches and co packaged optics, and effective cost control and capacity expansion.

Once you have a sense of which Narrative feels closer to your expectations for Lumentum Holdings, you can use it as a reference point against the current share price rather than relying on a single DCF or multiple based output.

Do you think there's more to the story for Lumentum Holdings? Head over to our Community to see what others are saying!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.