Fiber-optic stocks are running at light speed againFiber-optic stocks are running at light speed again

Investors remain on the hunt for companies positioned at choke points in the AI investment frenzy, allowing them to vacuum up a healthy share of the cash pouring into the great AI build-out.

When that wave of capital hits such a bottleneck, it causes product prices to surge, explodes profit margins, and often sends stocks soaring. All three of those things have happened for the companies that produce optical components for AI, and they’ve caught another leg up in recent days after looking wobbly at the start of the Iran war.

• These so-called optics companies all handle slightly different aspects of the same undertaking: using light and electrical signals to almost instantly transfer the data that AI technology both consumes and produces. 
• And over the past few months, the cluster of optical stocks — Lumentum (up 989% over 12 months), Coherent (up 255%), Ciena Corp. (up 518%), and Corning (up 185%) have elbowed their way toward the top of the heap of AI-related trades.
• Analysts say the scale of the AI boom — and AI’s requirements for bandwidth, speed, and power — is beyond the capacity of some long-standing networking technologies, such as the copper cables that carry signals using electricity. 
• “Copper is an excellent medium at short reaches (<10 meters),” wrote Bank of America analyst Vivek Arya. “But as hyperscalers build larger compute nodes, interconnect even more nodes, and link geo-dispersed data centers, the role of optics expands.” 

The gains accelerated Tuesday when Lumentum — which was only officially added to the S&P 500 at the start of the week — jumped 10% and Corning rose 8.4%, making them the two top gainers in the S&P 500 for the day. Coherent, which also just joined the blue-chip index, rose nearly 7%. Lumentum closed at an all-time high, up a whopping 44% off its post-war low just 19 days prior.

The Takeaway

The largest part of the optical technology market related to AI is in so-called transceivers. These devices transform electrical signals into light that can be sent through fiber-optic cables. Transceivers also transform light back into electrical signals that computers can read as data. 

Morgan Stanley analysts estimate the AI-related transceiver market amounts to roughly $50 billion, and is a particular strength for companies like Lumentum and Coherent. The data center build-out has been huge for the sector, as**** transceivers account for roughly 10% of the cost of a typical data center, according to Morgan Stanley.