Lumentum (LITE) reported a fiscal Q4 beat, but investor reaction was muted until there is clearer visibility on near-packaged optics, or NPO, considered the next major catalyst, Morgan Stanley said in a note Wednesday.

The investment firm said it has been too conservative on Lumentum because it expected margins to come under pressure from capacity coming on in the space. Instead, stronger-than-expected demand, better yields, and a more diversified product mix have kept margins well above expectations, according to the note.

"The next catalyst for Lumentum is more formal contract/insight into how NPO opportunity plays out, and what type of margin profile that business would carry," the firm said.

The company did not provide that level of detail this quarter and indicated that more formal announcements may not come for another couple of quarters, the firm said, adding that, in the near term, it is more positive on Lumentum because it sees limited downside, particularly with potential FCC rules ahead.

Morgan Stanley raised its price target on Lumentum to $1,000 from $900, and kept its equal-weight rating.

Shares of Lumentum were up 6.8% in Wednesday trading.

Price: 876.31, Change: +55.72, Percent Change: +6.79