The Second Spring for Optical Communications Stocks: AI Traffic Tailwinds for Coherent, Lumentum, and Ciena

$Coherent (COHR.US)$$Lumentum (LITE.US)$$Ciena (CIEN.US)$$Alphabet-C (GOOG.US)$$NVIDIA (NVDA.US)$$Intel (INTC.US)$

The AI boom first lifted GPU stocks, followed by servers, power infrastructure, and cooling solutions. Now, capital is re-evaluating optical communications. The reason is straightforward: when tens of thousands of accelerators form AI clusters, massive volumes of data must be exchanged at high speed—between chips, across server racks, and even among different data centers. The larger the computing scale, the higher the demands for network bandwidth, transmission distance, and energy efficiency. Fiber optics are gradually replacing copper wiring, 800G is upgrading to 1.6T, and co-packaged optics (CPO) is transitioning from a technical concept into actual orders. Optical communications companies, once dictated by telecom operators’ capital expenditures and inventory cycles, are thus experiencing a 'second spring.'

This recovery differs most significantly from traditional cycles in that demand isn’t just about replacing old equipment—AI architecture itself is increasing the value content of optical components. As large models shift from training to inference, data traffic is no longer concentrated in a single data center; instead, enterprise private clouds, sovereign AI, and agent-based AI all require greater interconnection among data centers. Optical communications has evolved from a mere networking accessory into an integral part of computational efficiency—any latency or failure could leave expensive GPUs idle.

The three companies are not benefiting from the same type of tailwind

Coherent’s strength lies in vertical integration. The company spans indium phosphide, VCSELs, lasers, optical components, and transceiver modules, enabling it to supply short-reach scale-up, intra-data-center scale-out, and inter-data-center scale-across connectivity. In its fiscal third quarter ending in 2026, revenue rose 21% year-over-year to $1.81 billion, with management highlighting particularly strong demand from data centers and communications. NVIDIA’s subsequent $2 billion investment and multi-year purchase commitment further solidified Coherent’s strategic position in the advanced laser and optical networking supply chain.

Lumentum is smaller in scale but exhibits greater earnings leverage. Its core competencies focus on EML lasers, pump lasers, cloud optical transceivers, optical circuit switches, and long-haul transmission components. In the third quarter of fiscal year 2026, revenue surged 90% year-over-year to $808 million, and non-GAAP gross margin rose to 47.9%. Backlog for optical circuit switches has exceeded $4 billion, and co-packaged optics have secured several hundred million dollars in new orders. Nvidia has also invested $2 billion in the company, reflecting how AI giants are using capital commitments and procurement agreements to lock in critical optical capacity ahead of time.

Ciena benefits at a level closer to network systems. Rather than simply selling lasers or modules, it provides coherent optical transmission equipment, WaveLogic chips, routing and switching solutions, and network automation software—primarily handling traffic between data centers and across wide-area networks. Second-quarter revenue grew 40% year-over-year to $1.57 billion, with optical networking revenue accounting for approximately $1.1 billion, or 70% of total revenue. The company has also raised its full-year revenue guidance to approximately $6.3 billion, indicating that AI-driven tailwinds have now extended from within data centers to metro and long-haul backbone networks.

Among the three, Coherent excels in product breadth and manufacturing scale, Lumentum stands out for the profit leverage delivered by high-value components, and Ciena leads with its integrated systems, software, and strong relationships with telecom carrier customers. If AI-driven network expansion continues, these companies are not mutually substitutable; instead, they each capture different segments of the same traffic growth curve—from components, to modules, to transmission systems.

However, this 'second spring' does not mean the cyclical nature of the industry has disappeared. With hyperscalers highly concentrated, a single platform transition, product certification delays, or a slowdown in capital spending could cause significant order volatility. In Ciena’s second quarter, two major customers together accounted for 34% of revenue. Coherent and Lumentum are rapidly expanding capacity, which could create overcapacity pressures if supply-demand dynamics reverse in the future. More importantly, while co-packaged optics may boost demand for high-power lasers, they could also disrupt the traditional value distribution of pluggable modules—not all product lines will benefit equally.

Therefore, assessing whether optical communication stocks can sustain re-rating requires looking beyond revenue growth alone. Key factors include the ramp-up pace of 1.6T products, gross margins, customer diversification, and whether new capacity can translate into free cash flow. The AI traffic tailwind is real and could last for years, but valuations will ultimately reward companies that possess core technologies, disciplined capacity management, and strong pricing power. The second spring for optical communications has arrived—but not all three companies may traverse it at the same pace.

Yee Hap Holdings Investor Relations Department

(Chip & Compute Power Series #85)

79K Views