We recently compiled a list of the 10 Worst Affordable Tech Stocks to Buy According to Short Sellers. In this article, we are going to take a look at where Lumentum Holdings Inc. (NASDAQ:LITE) stands against the other affordable tech stocks.
The rapid advancements in Al, computing, and human-machine interaction are the critical drivers for global companies’ strong adoption of technology. Garner believes that agentic Al is expected to emerge over the next 2-3 years – with capabilities going beyond tasks such as summarizing information to taking action. While Al is being used to provide options to the users, this technology will be able to choose the option that is optimal for the user. Therefore, the most important use cases for Al in 2025 will involve the relationships between humans and machines.
The technology domain involves substantial innovation, ranging from groundbreaking Al and Machine Learning advancements to the transformative potential of blockchain and loT. Industry veterans believe that next year should be a transitional one for the generative Al as technology companies will focus on experimenting and finding applications that can help drive efficiency and productivity.
Global Growth with the Help of Cloud, Al, and Cybersecurity
The elevated interest rate environment, concerns regarding recession, and geopolitical challenges led to the slight weakening of global technology spending in 2023. Now, experts are seeing a light on the horizon.
Economists have become more optimistic about the US economy, for the tech sector specifically. Due to strong adoption trends of Cloud and Al, global analysts are now optimistic about a potential return to modest growth in 2024, with stronger prospects for 2025.
Deloitte believes that global IT investments should be aided by double-digit growth in spending for software and IT services in 2024. There are expectations that public cloud spending might see an increase of more than 20%, with stronger demand for cybersecurity. Al investment (not specifically about generative Al) should also contribute to overall spending growth. Economists continue to project that Al-related investments might touch $200 billion globally by 2025, led by the US.
Market experts believe that cybersecurity should play an important role in the comeback. Deloitte recently highlighted that analysts continue to project low double-digit growth in global spending on security and risk management from 2023 to 2024. Adoption should be fueled by the persistent threat landscape, ongoing cloud adoption, the emergence of generative Al, and data privacy and governance regulations.
On the software front, Deloitte projected that nearly all the enterprise software companies will be embedding generative Al in at least some of their products in 2024 and that the revenue uplift (for such companies and cloud providers of gen-Al processing capacity) should approach a US$10 billion run rate by the year-end. On the hardware front, Deloitte believes that the uplift for chips and servers executing generative Al should exceed US$50 billion in 2024.
Technology Trends Defining the Future
The major technology trends are expected to create opportunities, result in innovation, and become imperative to gain a competitive edge in the business world. While AI and ML continue to top the list of tech trends likely to dominate the future, experts believe that Robotic Process Automation (RPA), Blockchain Technology, Industry Cloud Platforms, and Machine Customers are also on the list.
RPA helps organizations to transition to dynamic norms of automating organizational repetitive tasks with effectiveness and high precision. It revolves around employing software robots that perform tasks, like entering data and other related tasks, exactly like humans. Infosys believes that the global RPA market should touch ~$13.74 billion by 2028, reflecting a CAGR of 32.8%. With leading companies reaching the end of the learning curve, the full benefits of RPA are becoming visible. The exponential requirements for automation, a target of increased productivity, and lower operational costs should act as growth drivers.
Next, machine customers refer to AI systems that are empowered to make purchase decisions and have autonomous communication with a business. The technology leverages the options, data, and algorithms to think and transact. As per Gartner, CEOs expect that ~15% – 20% of their revenue should come from machine customers by 2030. The potential to convert billions of machines into customers offers opportunities worth trillions.
Our methodology
To list the 10 Worst Affordable Tech Stocks to Buy According to Short Sellers, we used a Finviz screener to filter out the stocks in the technology industry and we chose the ones having high short interest. Next, we narrowed our list and chose the stocks that are trading at less than the forward earnings multiple of ~22.53x (since the broader market is trading at ~22.53x, according to WSJ). Finally, these stocks were ranked in ascending order of their short interest.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
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Lumentum Holdings Inc. (NASDAQ:LITE)
Short % of Float (As of 30 August 2024): 17.87%
Forward P/E as of 23 September 2024: 17.85x
Lumentum Holdings Inc. (NASDAQ:LITE) is engaged in manufacturing and selling optical and photonic products in the Americas, the Asia-Pacific, Europe, the Middle East, and Africa.
Short sellers opine that customer demand is expected to remain weak, which might impact its overall financial performance. Since Lumentum Holdings Inc. (NASDAQ:LITE)’s costs are highly fixed, mainly because of manufacturing capabilities, the decline in revenue might impact its EBITDA margins. The short sellers have also highlighted the tough environment in the optical components industry. The challenges in the cloud and networking segment and the industrial tech segment (because of weak end market demand), might weigh over its performance. Moreover, the tech business of Lumentum Holdings Inc. (NASDAQ:LITE) might be pressured because of customer inventory adjustments.
On the other hand, Wall Street analysts believe that Lumentum Holdings Inc. (NASDAQ:LITE)’s business is expected to be aided by investments in new cloud and Al opportunities, which should significantly elevate its cloud business. Moreover, Lumentum Holdings Inc. (NASDAQ:LITE) continues to see a substantial rise in orders for Datacom chips and it is actively expanding its customer base in the data center market. Collectively, these factors are expected to mitigate the short-term challenges.
Lumentum Holdings Inc. (NASDAQ:LITE) has been focusing on scaling up its production capacity. It continues to focus on new technologies such as optical switching and high-density optical links. Moreover, market experts expect significant growth in 2026 and 2027, mainly in cloud business.
Analysts at Rosenblatt Securities upped their price objective on the shares of Lumentum Holdings Inc. (NASDAQ LITE) from $65.00 to $69.00, giving a “Buy” rating on 15th August. Insider Monkey’s 2Q 2024 revealed that the company was in the portfolios of 32 hedge funds.
Overall LITE ranks 5th on our list of the worst affordable tech stocks according to short sellers. While we acknowledge the potential of LITE as an investment, our conviction lies in the belief that some deeply undervalued AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for a deeply undervalued AI stock that is more promising than LITE but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.