"Wall Street's 'shiny toys': how the AI boom has unraveled the stocks of optical companies

The infrastructure boom of artificial intelligence has gone beyond the semiconductor market, turning manufacturers of optical components into the new "favorites" of Wall Street, Bloomberg writes. Shares of such companies as Applied Optoelectronics, Lumentum Holdings, Coherent, Fabrinet and Corning have shown rapid growth this year. However, as Bloomberg notes, such dynamics will be difficult to maintain, given the volatility traditional for AI businesses.

Lumentum shares became the absolute leader among optical companies in the market over the last 12 months: they soared by more than 1330%, which ensured its second place in the list of the best-performing securities in the S&P 500 index. Applied Optoelectronics also showed impressive results over the same time period - a 573% increase, of which a jump of almost 90% occurred in February alone. Close the top three Coherent with a jump of almost 360% (ninth place in the S&P 500 over the past 12 months), writes Bloomberg.

These securities have repeated the path of AI chipmaker Nvidia, soaring amid hundreds of billions of dollars in bigtech spending on data center infrastructure, the agency explains. However, such rapid growth may prove difficult to sustain, especially given the inherent volatility of the business, Bloomberg notes.

In trading on April 2, quotations of Lumentum jumped by 5.7% amid a decline in the broad market, Applied Optoelectronics soared by 17.8%, Coherent - rose by 4.2%.

The interest in optical component manufacturers is explained by the fundamental reasons behind the AI boom, Bloomberg explains. For example, the leader in AI chips, Nvidia, is focused on developing silicon photonics. This technology uses light instead of electricity, which travels through traditional copper wires, to transmit data faster and more efficiently. The concept has been around for decades, but was previously unclaimed as copper was cheaper and did well in this area. Now, however, giant data centers built for AI needs require components that transmit data literally at the speed of light.

And while Nvidia says copper cabling is still important for server racks, last month the company announced a $2 billion investment in each of Lumentum and Coherent as part of multiyear agreements. The investments are "like pouring oil on a fire" and underscore how critical optical components have become for data communications, says technology strategist at Robert W. Baird & Co. Ted Mortonson.

"The ecosystem is very narrow, with only a few names in it, but they have all become the new 'shiny toys' for the market," Mortonson emphasized. - There is a lot of speculation and over-enthusiasm. There is no fear, no panic, no anxiety. And I remember a time when nobody wanted these stocks for nothing," he added.

Optical companies have long been considered cyclical (with regular up and down cycles), similar to memory makers such as Micron or Western Digital, Bloomberg adds. However, the scale of bigtech capital spending on AI is causing some market participants to reconsider that view. Amazon, Microsoft, Alphabet and Ma have already announced that they will spend $618 billion in 2026 on AI infrastructure (up from $376 billion in 2025).

"In my entire career, I've never seen such explosive cost growth," Mortonson admits, emphasizing that the shift to ultra-high bandwidth is turning the trend for optical companies into a structural trend that can last for years.

However, despite the growth of quotations, by traditional metrics shares of companies in the sector look overvalued, Bloomberg adds. Lumentum shares are trading at a forward P/E multiple (showing the ratio of current share price to projected 12-month earnings) of about 60, which is three times the company's 10-year average. A similar multiple for Coherent stock is at 35, about double the company's average over the past decade.

"Such assessments give grounds for caution with regard to this group," said David Russell, head of market strategy at TradeStation. He believes it is worth being particularly careful against the backdrop of macroeconomic instability due to the war in the Middle East. "Unless the situation goes to the worst-case scenario, the group's fundamentals look compelling. But if the uncertainty drags on, investors will start to reassess the risks. If there is no resolution to the military conflict, hyperscalers may start cutting capital expenditure," he warns.

Still, so far the bigtechs aren't showing signs of cutting back on AI spending, Bloomberg points out. "Given how much they [optical companies] could be making in three years, do their current stock prices seem overvalued to me? No," Mortonson said. - Will they move in spurts? Yes. Could another player take the lead from them? Yes. But I still think that if you don't own their shares, you will lag behind," the expert stated.

Other Wall Street analysts are slightly less positive about the securities of optical companies. 19 experts, observing shares of Lumentum, recommend them to buy, six more advise to hold. Coherent securities have 18 recommendations to buy (ratings Buy and Overweight), five - "hold" and one - sell (rating Underweight). Analysts have a similar opinion on shares of Applied Optoelectronics (four recommendations to buy and three to hold).

This article was AI-translated and verified by a human editor