Market’s Momentum Darlings Resurface as Optical Stocks Take Off

Optical component makers are surging again as investors grow confident in sustained AI capital spending, with Applied Optoelectronics Inc. up 76% in nine sessions and Coherent Corp. gaining 48% since late July. The rally follows strong earnings from Lumentum Holdings Inc. and reports that the Federal Communications Commission is drafting a ban on some Chinese data center components, which could boost US suppliers. "Optical stocks are on fire because they're the bottleneck within AI," said Michael Monaghan, portfolio manager at Founder ETFs.

Bloomberg -- One of the stock market's favorite momentum plays from earlier this year is re-emerging as rising confidence in artificial intelligence spending sends the shares of optical component makers soaring again. Stocks like Applied Optoelectronics Inc., Lumentum Holdings Inc., Coherent Corp., Fabrinet and Corning Inc. are on a scorching run, with each climbing more than 25% since late July. The leader, Applied Opto, has soared 76% in just nine sessions, while Coherent has gained 48% over that stretch. The move comes as investors grow increasingly confident that ambitious AI capital expenditure plans from technology giants like Microsoft Corp., Alphabet Inc., Amazon.com Inc. and Meta Platforms Inc. will keep going. "Optical stocks are on fire because they're the bottleneck within AI, which adds to their pricing power and orders, and fuels their momentum," said Michael Monaghan, portfolio manager at Founder ETFs. "So long as we see a continued acceleration in capex spending, they should continue to move up." Applied Opto, Coherent, Fabrinet and Corning all gained in premarket trading Wednesday after Lumentum's fourth-quarter earnings and first-quarter outlook both topped analyst expectations. Optical components use light to move data faster and more efficiently than traditional copper wiring. Demand for this equipment has exploded amid an unprecedented build out of data centers for artificial intelligence computing. The stocks took off earlier this year as cash poured in to meet that demand. From the start of 2026 through the middle of May, Corning, Lumentum and Coherent leaped more than 100% and were among the 15 best performers in the S&P 500 Index, while Applied Opto, which isn't in the broad equities benchmark, surged 446%. Right around that time, however, investors started turning skeptical about AI spending. The change in sentiment was first apparent in semiconductor stocks, but it eventually spilled over into a broader technology selloff that lasted through the end of July. However, as the Big Tech companies started showing strong cloud-computing sales and committed to continuing their massive spending, the vibes shifted again, sending the beneficiaries of all that cash, like optical firms, racing higher all over. At this point, the outlook for capex from the major hyperscalers is more important to these stocks than the companies' individual results. "Right now people are watching the capital spending more so than earnings or revenue," Monaghan said. "If the spending slows down, you'll see these names roll over." The latest catalyst for optical stocks was last week's report from Reuters that the Federal Communications Commission is drafting a ban on imports of some Chinese data center components, including certain optical transceivers. While the plan isn't final, if enacted it would likely result in even more money heading to US optical equipment manufacturers. "If we see a China ban, that would only increase the bottleneck status of domestic suppliers," Monaghan said. "However, there's risk and volatility that comes along with that, because if a bottleneck gets solved or ends, you can see value get pulled really quickly." Accelerating Demand Demand is expected to accelerate in 2027, according to Bloomberg Intelligence. Revenue at Applied Opto jumped more than 80% last year and that pace is expected to accelerate to 130% this year and 174% in 2027, according to data compiled by Bloomberg. Lumentum is also projected to post a pronounced rise in revenue growth in its current fiscal year. Meanwhile, the companies are already showing improved fundamentals from all the spending. Applied Opto reported an 86% rise in second-quarter revenue in its earnings last week, and analysts' expectations for its 2027 revenue have jumped more than 90% in the last six months. The stock has gained 285% this year. Lumentum, whose shares have risen 123% in 2026, reported strong results for its fiscal fourth quarter Tuesday afternoon and gave a first-quarter forecast that was well ahead of analyst estimates. Coherent, which is up 78% this year, reports after the market close, as does Cisco Systems Inc., which also makes optical networking products and has risen 56% this year. Of course, the companies will need this projected growth to materialize to justify their lofty stock market valuations. Lumentum is among the 40 most expensive stocks in the S&P 500, trading at 41 times earnings estimated over the next 12 months, more than double its average multiple over the last 10 years of 19. Coherent and Fabrinet also trade at similar premiums to their long-term averages. In a sign of how the demand landscape has changed, Nvidia Corp. earlier this year announced multiyear investments of $2 billion in both Lumentum and Coherent as part of its push to develop silicon photonics. Demand associated with Nvidia's Vera Rubin servers "could mark a watershed moment for co-packaged optics," Bloomberg Intelligence analyst Sean Chen wrote in June. The pivot of AI architecture toward optical products and away from copper represents a pronounced long-term tailwind for the companies. But it won't begin in earnest until 2027, and in the meantime the stocks will probably experience some extreme swings like they did earlier this year, according to Ted Mortonson, technology strategist at Robert W. Baird & Co. "Valuations don't make sense for this year, but they look more attractive if you can view them for what they will make in 2027, 2028, or 2029, which is when we will be seeing the real uplift in demand," he said. "Until we get to that point, however, they will be hard to trade, and I would not be surprised if something breaks. You have to gird your loins and know they will be volatile." Tech Chart of the Day Tencent Holdings Ltd.'s revenue grew a faster-than-projected 11%, keeping up the steady pace of expansion it needs to finance a costly AI services and infrastructure buildout. Top Tech Stories Six of the biggest names in finance are helping Nvidia Corp. ease some of the investor anxiety that's been building for weeks over its swelling commitments to backstop the artificial intelligence boom. CoreWeave Inc., a provider of computing that powers artificial intelligence systems, surged in premarket trading after the AI spending frenzy spurred faster sales growth than anticipated. Cognition AI Inc. is in early talks with investors for a new funding round that may boost the coding startup's valuation by more than 50% to at least $40 billion, people familiar with the matter said. Situational Awareness bought shares in Japanese server components maker Taiyo Yuden Co. in late June and built up its stake to as much as 16.61% before cutting it back down, according to multiple filings by the artificial-intelligence hedge fund. Earnings Due Earnings Postmarket: Alpha & Omega Semiconductor Lt AOSL US Cisco Systems, Inc. CSCO US Coherent Corp. COHR US ComScore Inc. SCOR US Harmonic Inc. HLIT US Kimball Electronics Inc. KE US --With assistance from Subrat Patnaik, John Liu, Zheping Huang and David Watkins.