Damo: Mewell Technology (MRVL.US)'s $115 billion acquisition of Lumentum is expected to strengthen the advantages of AI optical communication, and the stock price was oversold by the market

The Zhitong Finance App learned that Morgan Stanley's latest research report indicates that Mewell Technology (MRVL.US)'s acquisition of optical communication equipment manufacturer Lumentum (LITE.US) for about 115 billion US dollars is a deal with aggressive pricing and high execution risk, but it is expected to help Maywell establish a stronger competitive advantage in the next-generation artificial intelligence (AI) optical interconnection market. Considering Maywell's previous good record of successfully integrating multiple technology companies, Damo believes that the negative reaction of the market to this deal may have been excessive.

According to the final agreement announced by the two parties on November 2, Maywell will acquire Lumentum on an all-share basis. The latter shareholders will receive 4.5 shares of Maywell shares for every Lumentum share they hold. The corporate value corresponding to the transaction was approximately US$115 billion, equivalent to approximately US$1,132 per Lumentum share, a 23.9% premium over the closing price of October 28, which was not affected by the trading news.

After the transaction is completed, Maywell's original shareholders will hold approximately 67% of the combined company's shares, and Lumentum shareholders will hold approximately 33%. The transaction is expected to be completed in the first half of 2028 and is still subject to approval from both shareholders and relevant regulators.

Morgan Stanley pointed out that this deal is the largest semiconductor industry acquisition that has been agreed upon so far, and the deal is 10 times larger than Mywell's previous acquisition of Inphi. Despite the high acquisition price, the technology integration logic behind it is worth watching.

The integration of AI optical communication technology became the core logic of the acquisition

Damo believes that as the scale of AI data centers continues to expand, optical communication technology is gradually transforming from traditional data transmission components to critical infrastructure that determines the performance of computing systems. Maywell has advantages in the fields of digital signal processors (DSPs), network switching chips, and custom chips, while Lumentum has indium phosphide (InP) laser manufacturing capabilities, optical exchange technology, and related production capacity that are difficult to replicate.

By integrating the technologies of both parties, the new company is expected to jointly design laser light sources, optical engines and switching chips, thereby improving data transmission performance, shortening the product verification cycle, and increasing the product value of a single optical connection.

Damo pointed out that in the next generation of AI computing systems, customers are increasingly inclined to purchase highly integrated optical communication solutions from the same supplier. Compared to simply establishing a partnership, the direct acquisition of Lumentum can also help Maywell ensure access to critical laser production capacity currently under tight supply.

Lumentum is a leader in several segments, including 200G EML lasers, pump lasers, and optical path switching equipment (OCS) for high-speed optical modules. Among them, the company's share of the pump laser market reached 70% to 80%.

Additionally, Lumentum is an important player in Nvidia's (NVDA.US) optical communications supply chain. According to the Damo Research Report, Nvidia previously invested 2 billion US dollars in Lumentum and made procurement commitments of several billion US dollars, further highlighting the strategic value of its optical technology.

Lumentum's performance is strong, and orders for AI optical communication continue to grow

Notably, when the acquisition was announced, Lumentum's latest quarterly results also showed strong demand for AI. According to the Morgan Stanley Research Report, Lumentum's revenue for the first quarter of fiscal year 2027 reached US$1,263 billion, up 25.5% from the previous month, slightly higher than the market's agreed expectations.

Profitability performance was more prominent. Non-GAAP gross margin reached 53.2% for the quarter, about 1.7 percentage points higher than market expectations; non-GAAP operating margin reached 42.3%, about 2.5 percentage points higher than market expectations. Non-GAAP earnings per share reached $4.57, about 9% higher than the market's consensus forecast, and also surpassed buyers' expectations of $4.40 to $4.45.

More importantly, Lumentum announced that it has received an order for the second large-scale near-package optics (NPO) and co-encapsulated optics (CPO) project, with related procurement commitments exceeding US$5 billion, and shipments are expected to begin in the second half of 2027.

The company also pointed out that pump lasers and optical path switching equipment are the main drivers of current business growth. As OCS demand prospects become more clear, the business is expected to grow into a multi-billion dollar business with annual revenue in the future.

For the second quarter of fiscal year 2027, Lumentum's revenue guidance was about US$1.6 billion, which was about 7% higher than the market's consensus forecast; the non-GAAP earnings per share guidance was approximately US$6.05, which was about 19% higher than market expectations.

The company expects the non-GAAP operating margin to rise further to 45% to 46% in the next quarter, indicating that the expansion of business scale continues to drive improvements in profitability.

Expected annual cost savings of over $1 billion, but overvaluation means limited room for fault tolerance

According to Maywell's management expectations, the merged company can achieve a continuous cost synergy of more than 1 billion US dollars per year, mainly due to product cost optimization and supply chain integration. The two sides also expect to increase the combined company's non-GAAP earnings per share in the first year after completion of the transaction.

According to Damo's analysis, these cost savings mainly come from integrating the two parties' existing products into each other's solutions and reducing reliance on third party suppliers. However, since Lumentum is currently an important customer of Maywell, some of the existing internal transactions between the two parties will be offset after the merger, so actual collaborative benefits will still depend on subsequent product integration and market expansion.

According to Damo's simulated estimates, the combined company's revenue in 2029 is expected to reach about 71 billion US dollars, non-GAAP gross margin of 57.8%, operating profit margin of 46.8%, and non-GAAP earnings per share of 20.27 US dollars.

This earnings per share forecast is about 3% higher than the market's consensus estimate of $19.76 in 2029. However, Damo stressed that since the deal is not expected to be completed until 2028, there is still a great deal of uncertainty about the relevant predictions.

Meanwhile, the $115 billion transaction valuation has also raised concerns about acquisition costs in Damo. According to Lumentum's current quarterly revenue annualized calculation, the corporate value of Maywell's current payment is about 22 times its revenue; if the 2026 revenue is calculated, the valuation reached about 38 times.

Damo pointed out that historically, the valuation of acquisition transactions in the optical communications industry is usually about 2 to 11 times the revenue of the past 12 months. Although Lumentum's AI business growth prospects and scarce production capacity can support a certain premium, such a high price means that the transaction has little room for error.

Damo: Consolidation risks cannot be ignored, but Maywell's stock price is being sold too much

Morgan Stanley believes that one of the main risks facing this acquisition is that Lumentum's current high profit margins may be difficult to maintain in the long term. Due to the tight supply of indium phosphide lasers, Lumentum's current profit level is higher than its previously set long-term target. If the industry's production capacity increases, competition intensifies, or AI infrastructure investment slows down in the future, its product prices and profit margins may face downward pressure.

Another risk comes from customer relationships. Maywell currently supplies DSP chips to a number of optical module manufacturers, and some of these customers happen to be Lumentum's competitors. Once the acquisition is complete, these customers may be concerned that Maywell will lose its neutrality as an independent chip supplier and then switch to other suppliers. Furthermore, the capital expenditure intensity of Lumentum's manufacturing business is higher than that of Mywell, which may increase the fixed costs and operating cycle risks of the merged company.

However, Damo emphasized that Maywell has a good historical record in mergers and acquisitions. Previously, Maywell's acquisitions of Cavium, Inphi, and Avera all surpassed the original revenue and cost synergy targets. Among them, the Inphi business is expected to grow more than tenfold in size since it was acquired.

Damo believes that these successful experiences have provided some confidence in Maywell's large-scale acquisition, although the $115 billion deal size means that management will face far greater integration challenges than before.

The bank pointed out that the acquisition was strategically reasonable, but the financial requirements were high. The key to future success is whether the two sides can transform their technological advantages in the field of AI optical communication into sustainable high-profit growth while preventing Maywell from losing existing DSP customers.

Overall, Damo believes that although there are substantial execution risks in this transaction, the sell-off reaction of Maywell's stock price after the news was announced was excessive. As of the close of trading on November 2, Maywell's stock price was $171.41. Morgan Stanley maintains its “hold and wait” rating, with a target price of $300; while maintaining Lumentum's “hold and wait” rating, with a target price of $1,000.