Lumentum Holdings Inc (NASDAQ: LITE) is the world leading manufacturer of optical products for telecom networks. The company specialises in lasers that send light long distances over optical fibres, optical switches, industrial lasers used in applications such as cutting and welding, and is the dominant producer of lasers for 3D sensing.

What Does Lumentum Do?

Its 3D laser design, developed over several years primarily for Apple Inc. (NASDAQ: AAPL), enables highly reliable lasers to be produced at high volume. Lumentum has 80% market share of 3D lasers used in smartphones, which is currently a $500 million market growing to an estimated $2 billion market by 2021. This growth is fuelled by applications such as facial recognition, enhanced photography and augmented reality, which are being increasingly adopted by individuals and companies alike.

iPhones currently have two front facing 3D sensors with a third rear facing sensor expected to be added in 2020 for augmented reality, and whilst Android smartphone makers such as Huawei and Samsung have lagged behind Apple technologically, they are also gradually adopting the technology. Although we predict Lumentum will lose some of its market share, particularly in the Android smartphone market, the company has a substantial lead producing higher specification sensors which offer reduced size and power consumption. 3D lasers are also expected to be used in LIDAR (light detection and ranging) sensors which enable advanced driver assist and autonomous driving in automobiles.

Last year the company acquired competitor Oclaro, which will generate earnings synergies this year and further sector consolidation is likely.

Why We Bought Lumentum Shares

We have chosen to invest in Lumentum for three key reasons.

The first is industry consolidation, whereby major consolidation in the sector has seen the top 4 players becoming 2 over the last six months.

Secondly, we find the company attractively valued at 11x FY20 PE. The company will be debt free by the end of 2019.

Lastly, there is strong demand. As consumer adoption and industry use increases for new technologies in the way of augmented reality, facial recognition and autonomous automobiles, so too will demand.

This article was contributed by James McDonald from Pengana. If you want to be the first to receive Pengana’s sharemarket analysis, you can subscribe to their quarterly insights for all of the latest stock stories by clicking here. It’s FREE to join!

Disclosure: Lumentum Holdings is currently held in the Pengana High Conviction Equities Fund.