Lumentum (LITE) is sustaining healthy margins as demand for its products across multiple categories continues to outpace supply, Morgan Stanley said in a note Wednesday.

The company posted fiscal Q1 adjusted earnings and net revenue "largely as expected given constraints, though at higher margins," the firm said. Lumentum also issued a stronger than expected fiscal Q2 outlook as it began to close the supply gap, according to the note.

Supply gap has widened to between 25% and 30% in the quarter from 20% previously, and questions remain over Lumentum's ability to ramp up production on expected timelines, while buy-side estimates are unlikely to change significantly in 2027, Morgan Stanley said.

The investment firm raised its fiscal Q2 estimates as EMLs continued to grow and the DCI business continued to outperform, contributing to gross margin upside.

Morgan Stanley raised its price target to $190 from $145, and maintained an equal-weight rating on Lumentum stock.

Shares of Lumentum increased more than 23% in recent trading Wednesday.

Price: 231.87, Change: +43.51, Percent Change: +23.10