Marvell's optical deal looks dangerously myopic

What happened

Marvell Technology, a $200 billion chipmaker, is considering a potential deal to buy Lumentum Holdings, Bloomberg reported Wednesday. Lumentum makes lasers and optical components that transmit data using light, speeding connections within and between data centers.

Confirmed

Global impact / market context

Buying Lumentum would give Marvell control over more of the data center supply chain and create an AI networking giant to better compete with Broadcom. However, Lumentum shares have soared 370% in the past 12 months, so Marvell may pay a high price for dimmer financial returns.

Analyst inference

Optical demand exceeds supply, with Bernstein expecting this through 2028 and Lumentum unable to meet about 70% of orders for some products through next year. Potential US restrictions on Chinese rivals could tighten inventory further, making Lumentum's scarce capacity more valuable to buyers.

Analyst inference

What to watch

1. Lumentum's boss Michael Hurlston has said some products are sold out into early 2029, and the $83 billion company cannot meet about 70% of orders for some offerings through next year. Confirmed
2. Watch whether Marvell proceeds with a formal offer for Lumentum and at what price, since any potential acquisition would need to justify paying up for a stock trading at 31 times expected 2027 earnings. Proposed
3. Monitor whether potential US restrictions on Chinese optical rivals tighten inventory further, which could raise Lumentum's strategic value and the price Marvell must pay to secure supply. Analyst inference

Evidence

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