• Investors may be wondering if Lumentum Holdings at about US$1,053 per share is still offering value, or if most of the easy gains are already on the table.
• The stock has logged a 7.9% move over the last week, 17.4% over the last month, and a very large return year to date of 172.7%, with multi-year returns also very large compared to the starting point five years ago.
• Recent coverage has focused on the sharp share price performance and what it might imply about changing expectations for the business. Some investors point to the long run track record as a key reference point, while others have raised questions about how much of that story is already reflected in the current share price.
• Lumentum Holdings currently has a valuation score of 3 out of 6. The next step is to look at how different valuation methods assess the stock today and then finish with a framework that can help you interpret those signals more effectively.

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

A Discounted Cash Flow, or DCF, model projects the cash Lumentum Holdings could generate in the future and discounts those projections back to today to estimate what the stock might be worth now.

For Lumentum Holdings, the model used is a 2 Stage Free Cash Flow to Equity approach, based on cash flows in $. The latest twelve month Free Cash Flow is about $135.9 million. Analysts provide Free Cash Flow estimates for the next few years, and Simply Wall St extends those out, with the 2035 projection reaching about $9.9 billion before discounting.

After discounting the projected cash flows, the model arrives at an estimated intrinsic value of about $1,623.63 per share for NasdaqGS:LITE. Compared with the recent share price of about $1,053, the DCF output implies the stock is around 35.1% undervalued on this set of assumptions.

Result: UNDERVALUED

Our Discounted Cash Flow (DCF) analysis suggests Lumentum Holdings is undervalued by 35.1%. Track this in your watchlist or portfolio, or discover 47 more high quality undervalued stocks.

Approach 2: Lumentum Holdings Price vs Sales

For companies that are already generating revenue, the P/S ratio is a useful way to see how much you are paying for each dollar of sales, especially when earnings can be affected by accounting items or investment cycles.

In general, higher expected growth and lower perceived risk can support a higher “normal” or “fair” P/S multiple, while slower growth or higher risk tends to justify a lower one.

Lumentum Holdings currently trades on a P/S ratio of about 30.34x. That is well above the Communications industry average of about 2.54x and also higher than the peer group average of around 10.56x. Simply Wall St’s Fair Ratio framework estimates what a more tailored P/S multiple could be, based on factors such as earnings growth, profit margins, industry, market cap and company specific risks. This is designed to be more informative than a simple comparison against industry or peers, which may have very different growth profiles or risk levels.

For Lumentum Holdings, the Fair Ratio is 39.58x, which is higher than the current 30.34x. On these inputs, the stock screens as undervalued relative to this P/S based Fair Ratio.

Result: UNDERVALUED

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Upgrade Your Decision Making: Choose your Lumentum Holdings Narrative

Earlier it was mentioned that there is an even better way to understand valuation. Narratives on Simply Wall St’s Community page let you attach a clear story about Lumentum Holdings to specific assumptions for future revenue, earnings, margins and fair value, then compare that fair value with today’s share price to help inform the timing of your decisions. Each Narrative updates automatically as new earnings or news arrives and allows room for very different views, such as a more cautious narrative closer to the lower fair value area around US$433.09, and a more optimistic one closer to the higher fair value area around US$1,033.69.

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.