By Christine Ji and Britney Nguyen
Optical components are becoming a critical chokepoint in AI infrastructure, as the data-center buildout drives strong demand for more efficient data-transfer methods
The AI data-center buildout is driving shortages of optical components, and Wall Street sees opportunities in optical suppliers.
First, it was graphics processing units; then, it was memory chips. Now, the latest artificial-intelligence bottleneck is optical interconnects, or the high-speed systems that allow massive chip clusters to communicate at the speed of light.
As AI models become ever larger, the industry's demands have moved beyond raw processing power to a model of distributed compute that has pushed traditional copper wiring to its limits. Optical interconnects transmit data between chips, boards and systems in data centers using light, instead of electricity as traditional copper wires do - improving bandwidth density and power efficiency, and lowering latency.
Without fiber-optic connectivity, even the most advanced chips are &#34;essentially worthless,&#34; Anthony Milovantsev, a partner at telecommunications consulting firm Altman Solon, wrote in an email to MarketWatch. &#34;Once training is spread across hundreds or thousands of [graphics processing units], the limiting factor becomes how fast and efficiently data can move between them,&#34; he wrote.
According to Bank of America analyst Tal Liani, the optical-transport market is expected to grow 10% in 2026 and 2027 as AI fuels a &#34;supercycle.&#34;
The tightening supply of optical components was reflected earlier this week, when AI kingmaker Nvidia (NVDA) announced multiyear strategic commitments with Lumentum Holdings (LITE) and Coherent (COHR) to purchase advanced laser and optical-networking products and secure future capacity-access rights. Nvidia also announced investments of $2 billion into each company for research-and-development purposes.
Don't miss: Coherent and Lumentum shares pop on Nvidia deals. Why optical stocks are so hot these days.
&#34;Optical interconnects and advanced package integration are foundational to the next phase of AI infrastructure,&#34; Nvidia said in a statement, noting the importance of ultrahigh-bandwidth and energy-efficient connectivity in massive-scale AI data centers.
The AI-chip maker has solidified its dominance in the ecosystem by strategically reinvesting its profits into customers and suppliers. Now, Wall Street analysts are seeing opportunities among names such as Lumentum, Coherent, Applied Optoelectronics (AAOI), Fabrinet (FN), Ciena (CIEN) and Cisco Systems (CSCO).
This isn't Nvidia's first foray into securing connectivity capacity. Last November, the chip giant announced a $1 billion stake in telecommunications giant Nokia (NOK) to accelerate the transition toward AI-native 5G and 6G networks.
See more: 10 stocks that let you invest like Nvidia in the next hot AI trade
In the wake of the recent Nvidia deals, Rosenblatt analyst Mike Genovese boosted his price target for Lumentum's stock to $900 from $580, while raising the target for Coherent shares to $375 from $300. The new price targets imply more than 50% upside from current stock prices.
Lumentum's laser capacity is sold out through fiscal 2027 and potentially 2028, Genovese highlighted in a note earlier this week, indicating that demand in the industry is far outpacing supply.
As with memory, storage and other components that are in a supply crunch from the AI data-center buildout, the imbalance has given suppliers a lot of pricing power.
Following Advanced Micro Devices' (AMD) deal with Meta Platforms (META) last month to deploy up to 6 gigawatts of its GPUs, Mizuho analyst Jordan Klein called it &#34;good news&#34; for the memory and storage makers, but also for optical-component suppliers like Lumentum, Coherent and Ciena. The companies should benefit from &#34;strong pricing dynamics,&#34; Klein wrote in a late February note - pointing to the need for optical interconnects and transceivers, which convert electrical signals into light to move data over fiber-optic cables.
Another sign of the increasing importance of optical components came from Marvell Technology's (MRVL) earnings report on Thursday, as the company's sales guidance for the current quarter showed &#34;inflecting demand for AI networking&#34; and custom chips, Susquehanna analyst Christopher Rolland said in a Friday note.
Marvell's stock gained more than 18% on Friday, following CEO Matt Murphy's comments that revenue growth is expected &#34;to accelerate&#34; each quarter of the current fiscal year, due bookings in its data-center business that are growing &#34;at a record pace.&#34;
&#34;The bulk of the upside this year is from interconnect,&#34; Jefferies analyst Blayne Curtis said in a Thursday note, pointing to the company's digital signal processors, which are critical for moving data at speeds up to 1.6 terabits per second. Marvell's optical business is expected to drive a lot of its overall data-center revenue, he added.
Meanwhile, the realm of fiber-optic networking is seeing a generational shift toward co-packaged optics, which refers to the optical-transceiver component being integrated directly onto the silicon substrate of the chip.
Genovese also flagged the optical manufacturer Fabrinet as an indirect beneficiary of the Nvidia announcement, raising his stock-price target to $715 from $550, implying roughly 40% upside. As Nvidia's primary manufacturing partner, an increase in Nvidia's laser supply will translate into increased demand for Fabrinet's packaging services.
Other laser makers such as Applied Optoelectronics are expected to benefit from the rising tide of demand, Raymond James analyst Simon Leopold wrote in a note this week. As the industry becomes more supply-constrained, Leopold expects more customers to enter into long-term agreements. Applied Optoelectronics is &#34;expanding its capacity and should be a market-share gainer,&#34; he wrote.
Read on: How Applied Optoelectronics became the latest viral AI stock
Bank of America's Liani also flagged Ciena and Cisco as optical winners in a Friday note, writing that both are &#34;positioned to capture a significant share of AI-driven interconnect spending as networks catch up to compute.&#34; As compute needs increase, AI hyperscalers are building &#34;scale-across&#34; architectures that link multiple small data centers together, and Ciena and Cisco are leaders in long-distance optics, according to Liani.
-Christine Ji -Britney Nguyen
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03-07-26 0800ET

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The AI data-center buildout is creating a demand surge for optical components, leading to a projected 10% growth in the optical-transport market by 2026-2027. Nvidia's recent multiyear commitments with Lumentum and Coherent highlight the importance of optical interconnects in AI infrastructure. Analysts are optimistic about stocks like Lumentum, Coherent, Applied Optoelectronics, Fabrinet, Ciena, and Cisco Systems, with significant price target increases reflecting strong demand and pricing power in the sector. The shift towards co-packaged optics is also noted as a key trend in fiber-optic networking.

- The demand for optical components is rising sharply due to the AI data-center buildout, creating a bottleneck in the supply chain.  
- Major firms, including Nvidia, are investing significantly in optical technology to improve data transfer efficiency, with analysts predicting a 10% growth in the optical-transport market by 2027.  
- As the industry faces supply constraints, optical suppliers like Lumentum and Coherent are expected to benefit from increased pricing power and demand for their products.

These 6 stocks could be major winners of an upcoming optics 'supercycle'