The AI megatrend hasn’t just been beneficial to poster child Nvidia (NVDA) or hyperscalers like Amazon (AMZN), Microsoft (MSFT), and Meta (META). The players involved in building the infrastructure for this revolutionary technology are playing a key role and have also earned the reputation of multibaggers, with names like Vertiv (VRT), Nebius (NBIS), and GE Vernova (GEV) being clear examples of lucrative bets on the “picks and shovels” of AI trading.
However, one important aspect of this “picks and shovels” space in AI that has not seen much headlines are suppliers of optical components.
Valued at approximately $287.3 billion in 2023, the global optical components market is projected to grow to $628.8 billion by 2032, showing a CAGR of 9.2% during the period. Optical components that enable fast data movement and low power consumption are critical for building large-scale AI. Optical fibers transmit data at extremely high speeds over long distances with much less signal loss than copper. Additionally, optical fibers use photons instead of electrons, thereby reducing heat, energy use, and cooling requirements.
Notably, Nvidia’s strong performance in the networking segment in the recent quarter (up 162% year over year) also makes the bullish case for investments in optical component companies stronger.
So, with the drivers installed, what stocks might be suitable selections from this location? Here are three names for investors to consider.
Founded in 1971, Coherent (COHR) is a global technology company focusing on photonics, optical materials and devices, lasers and compound semiconductors. The company’s operations span areas such as materials and components (compound semiconductors, optics), networking/communications photonics (for example, optical interconnects for data centers), and lasers/laser systems (industrial, scientific, and defense).
Valued at a market cap of $21.9 billion, COHR stock is up 60% on a year-to-date (YTD) basis.
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Meanwhile, the company’s fundamentals also look solid, with its earnings never falling short of estimates over the last two years. Even in the most recent quarter, Coherent reported declines in both revenue and earnings. Revenue for Q1 2025 came in at $1.58 billion, up 17% from last year, while earnings of $1.16 per share represent annual growth of 73.1%, exceeding Street expectations of $1.04.
Net cash from operating activities turned in a positive inflow of $296.8 million, compared to an outflow of $65.7 million in the year-ago period. Overall, Coherent finished the quarter with a cash balance of $852.8 million, well above its short-term debt level of approximately $90 million.
Overall, analysts remain cautiously optimistic about COHR stock, giving it a “Moderate Buy” consensus rating. The average target price of $158.94 suggests upside potential of about 4% from current levels. Of the 20 analysts covering the stock, 13 have a “strong buy” rating, one has a “moderate buy” rating, and six have a “hold” rating.
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Founded in 2000 as a low-volume, high-mix service provider for the manufacturing of complex optical components, Fabrinate (FN) is a contract manufacturing services provider (CMS/EMS) specializing in precision manufacturing, optical packaging, electro-optical modules/components, complex printed circuit board assembly (PCBA), and electro-mechanical process technologies.
With a current market capitalization of approximately $14 billion, FN stock is up nearly 85% on a YTD basis.
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Notably, both revenues and earnings for Q1 2025 exceeded estimates, with the latter having declined consistently over the past two years. In the latest quarter, the company reported revenue of $978.1 million, up 21.6% from the previous year. Earnings per share rose to $2.92 from $42.39 a year earlier, beating the consensus estimate of $2.82.
Net cash from operating activities in the quarter also increased to $102.6 million from $83.2 million last year. Overall, Fabrinate’s liquidity position was strong at quarter end, with a cash balance of approximately $305 million and negligible short-term debt of approximately $4 million.
Thus, analysts rate the stock as a “Strong Buy” with an average target price of $481.43. This suggests an upside potential of about 17% from current levels. Of the nine analysts covering the stock, five have a “strong buy” rating, one has a “moderate buy” rating, and three have a “hold” rating.
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We contracted with Lumentum Holdings (LITE), which was incorporated in 2015 when it was spun off from JDS Uniphase Corporation. Lumentum designs and manufactures optical and photonics-based solutions that serve high-speed communications (telecom, enterprise, data centers) and commercial laser-based applications (industrial manufacturing, sensing).
The company’s current market cap is $18.1 billion and its stock is up 245% on a YTD basis.
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And like its peers above, Lumentum’s quarterly earnings have consistently beaten Wall Street expectations over the past two years. Meanwhile, in the latest quarter Q1 2025 the company reported net revenue of $533.8 million, up 58.4% from the previous year. Additionally, earnings rose to $1.10 per share from $0.18 per share last year, surpassing the consensus estimate of $1.03 per share.
Net cash from operating activities increased to $57.9 million from $39.6 million last year as the company ended the quarter with a cash balance of $772.9 million. However, this was less than the company’s short-term debt level of about $1.2 billion.
Thus, analysts have attributed a consensus rating of “Moderate Buy” to the stock, whose average target price has already been surpassed. Even the higher target price of $290 has been surpassed at the time of writing. Of the 19 analysts covering the stock, 12 have a “strong buy” rating, two have a “moderate buy” rating, and five have a “hold” rating.
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On the date of publication, Pathikrit Bose did not have (directly or indirectly) any positions in any securities mentioned in this article. All information and data in this article is for informational purposes only. This article was originally published on Barchart.com
