Lumentum Is Set to Capitalize on Apple’s Advancements
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Lumentum Is Set to Capitalize on Apple’s Advancements

Apple Inc. (Nasdaq: AAPL, Rated “B”) continues to load up on augmented reality software businesses.

According to a report from Calcalist on Friday, Apple managers secretly purchased Camerai, an Israeli maker of computer vision software. Managers have been integrating its technology into future iPhones and software kits.

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Source: Redmond Pie

It was 2016 when Apple managers first expressed interest in AR. CEO Tim Cook told analysts the platform could be huge and he promised Apple would make investments accordingly.

Since then, the Cupertino, Calif.-based company filed numerous patents, bought start-ups, hired new managers and launched ARKit, its AR software developer kit.

When the iPhone 11 launched last September, it sported a three-camera setup on the back with a laser-equipped 3D sensor capable of measuring depth for AR. We now know Camerai photography technology, deep learning and computer vision software is integral to making it all work.

We also know Camerai’s platform is a big part of ARKit. Its software developer tools, Calcalist notes, don’t require AR technical knowledge. In many cases, apps can be developed without writing AR specific code.

This successful acquisition goes beyond Apple, though. It’s a win for Lumentum Holdings, Inc. (Nasdaq: LITE, Rated “C+”), too. Their sensors will be the direct beneficiary of this arrangement.

Currently, the San Jose, Calif.-based company is best known for making the front-facing sensor Apple uses for iPhone Face ID. In the past, that has been a great business for Lumentum.

But the real growth story is the 3D depth-measuring sensors the company makes for the back of smart devices. These world-facing sensors are key to making AR ubiquitous. And it begins with Apple’s devices.

Apple is notoriously cautious with breakthrough technologies. The iPhone maker wasn’t the first to put a multi-touch screen on a phone or add biometric authentication, like a fingerprint sensor. But when Apple made the leap, these sensors became a prerequisite for every device maker.

Related post: LITE is the Core of Apple’s AR Success

Apple managers used the company’s industry leadership to change the minimum standard for smart devices, then they leveraged the firm’s incredible scale to drastically drive down component prices.

Apple’s AR is expected to roll out gradually. If history is any indication, these sensors will land first on premium Apple handsets, allowing Lumentum to maintain healthy average selling prices as the company builds manufacturing scale.

Eventually, Apple should bring the sensors to more devices, with competitors likely to follow.

This is the key reason Apple’s progress is good news for Lumentum — it gets put in the sweet spot of these competing giants.

The firm is the largest supplier of 3D sensing laser diodes in the world. This technology is critical to future AR applications. And its relationship with Apple is not exclusive.

Now that the iPhone maker is moving to include Lumentum’s AR sensors on its devices, other phone makers will follow. Keep in mind, Android phones represent 85% of the global smartphone market, and that market is way more important than Apple to Lumentum.

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During a conference call with analysts in February, Lumentum managers were asked about the potential size of the 3D sensor market. CFO Wajid Ali discussed adding capacity for telecom customers in the early part of the year, and the potential for increased sales of world-facing products in the back half of 2020 as handset makers started to express interest.

On Aug. 11, the company announced its fourth-quarter and full fiscal year 2020 results. Despite the pandemic, sales climbed to $1.7 billion, up 7%. Gross profit margins rose 700 basis points to 46.5%. Most important, revenue for world-facing sensors exceeded expectations. This came despite robust demand for lower-end iPhones without AR world facing sensors.

Related post: Why Facebook Views AR as it’s Next Big Platform

Understandably, the stock has been a winner in 2020, up about 8% to trade near $86.00. Shares are trading at 13 times forward earnings and 3.7 times sales.


 

These metrics are extremely inexpensive given the potential for AR in smart devices and other applications. The total addressable market for smartphones alone might be in the hundreds of millions of devices.

Investors should consider buying Lumentum shares into the current weakness. It will not last.

Best wishes,

Jon D. Markman

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