Market Is Missing The Growth Potential For This Tech Leader

This leading iPhone supplier, which currently earns 30% of its revenue from Apple, has many excellent drivers that the market presently undervalues in the face of Apple’s doom and gloom. It has other excessive-growing business traces, new ability clients. It uses the products it sells to Apple, and it just finished the purchase of one of my top Long Ideas from the last 12 months to diversify its sales further away from Cupertino. Lumentum Holdings (LITE) is this week’s Long Idea.

More to the Story Than Apple

Photonics producer Lumentum, which spun out of JDS Uniphase in 2015, is well-known as one of the providers of vertical-cavity surface-emitting lasers (VCSELs) that power the 33D sensing FaceID function in modern model iPhones. Over the past year, VCSELs have become a first-rate component of Lumentum’s commercial enterprise, and Apple accounted for 30% of its revenue in 2018.

However, framing Lumentum as an Apple dealer paints a misleading picture of the business enterprise’s underlying economics. This characterization is due to misleading GAAP profits, which display the organization dropping cash each year until 2018. Figure 1 indicates that monetary income, the actual cash flow of the enterprise, in reality, turned high-quality in 2017, earlier than Apple became a key issue of the company’s sales.

LITE GAAP vs. Economic Earnings Since 2015

GAAP earnings extensively understated the enterprise’s authentic profitability in 2017 because of two principal non-recurring costs: (1) $104 million (10% of sales) charge for the increase in spinoff liabilities on its preferred stock and (2) the $27 million (3% of sales) fee for the increase in deferred tax assets.

As a result, LITE said a GAAP loss of $103 million in 2017, even though it earned high-quality financial profits of $14 million. In 2018, GAAP income rose sharply not only because of doing business with Apple but also because of an $eighty million (6% of revenue) advantage from tax reform. Combined, those accounting distortions recommended that Lumentum become a chronically unprofitable employer converted completely through its function as an Apple supplier.