Daiwa Securities has released a new investment research report on LuxNet Corporation—a major manufacturer of epitaxial wafers for optical communications—in which it raises its financial forecasts and target price for the company while maintaining a “Sell” rating.
Daiwa notes that although LuxNet has benefited from strong demand for silicon photonics materials—driven by cloud service providers (CSPs) aggressively building out AI data centers—and has delivered third-quarter results and a fourth-quarter outlook that both exceeded expectations, the stock is currently overvalued. Furthermore, the market’s optimism regarding the company’s profit margins is excessive, leaving the stock exposed to the risk of a downward correction.
The report highlights that LuxNet reported a net profit of NT$621 million for the third quarter (ending in 2026)—an increase of 33% quarter-on-quarter and 528% year-on-year—surpassing both Daiwa’s and the broader market’s expectations, largely due to lower-than-anticipated R&D expenses. The data center segment serves as the primary revenue driver, accounting for 80% to 85% of total revenue. Regarding the fourth-quarter outlook, LuxNet projects quarterly revenue to reach NT$1.8 billion—a quarter-on-quarter increase of approximately 16%—fueled by sustained strong demand for continuous-wave (CW) lasers (used in silicon photonics) and the company’s successful pass-through of rising costs for materials such as indium phosphide (InP) substrates.
The report further notes that to meet robust demand, LuxNet has entered into four-year long-term supply agreements (LTAs) with both CSP clients and substrate suppliers. Supported by these long-term contracts, the company plans to expand its production capacity by 150% annually between 2027 and 2028. Given the improved order visibility, Daiwa has raised its earnings per share (EPS) forecasts for LuxNet for the 2026–2028 period by 10% to 25%, projecting an EPS of NT$20.92 for 2026 and NT$32.35 for 2027. However, Daiwa also cautions that if global AI investment slows down by 2028, long-term contracts may fail to provide downside protection.
Despite strong revenue growth, Daiwa Securities highlights two major concerns for investors:
Limited gross margin expansion: Management has acknowledged that there is little room for significant further expansion in gross margins over the coming quarters—a reflection of the company’s relatively limited bargaining power within the supply chain when dealing with large global Cloud Service Providers (CSPs).
Excessive valuation: With its share price currently at approximately NT$2,580, the company is trading at a high valuation—80 times its projected 2027 earnings and 32 times its price-to-book ratio (PBR). Daiwa’s earnings-per-share (EPS) forecasts for 2027–2028 are 29% to 48% lower than the market consensus, suggesting that the market has become overly enthusiastic about the silicon photonics theme.