Optical stocks rally 6% as silicon photonics demand surges

Optical communication stocks extended their rally at the US market open on July 20, with Credo Technology surging 7 percent and Lumentum Holdings and Coherent both gaining more than 6 percent as investors piled into companies supplying the fiber-optic components essential for AI data center buildouts.

"The transition from copper to optics is no longer optional — it is a physical constraint on AI cluster scaling," said Rachel Kim, semiconductor supply chain analyst at Edgen. "When you push beyond tens of thousands of GPUs, copper cabling simply cannot carry the signal more than a meter without degradation. Silicon photonics is the only viable path forward."

Marvell Technology rose 4 percent and Corning added 3 percent, reflecting broad-based demand across the optical supply chain. The rally follows a Barclays upgrade of Lumentum to Overweight from Equal Weight, with the firm citing expanding gross margins, improved factory utilization, and a recent share price pullback that created a more approachable valuation.

Why copper is hitting a wall

Training a modern AI model requires thousands of chips to function as one giant processor, shuttling vast amounts of data among them. At the signaling speeds these clusters demand, a passive copper cable can carry a clean signal for less than a meter before it degrades. Pushing data further requires exponentially more electrical power, generating heat that drives up energy costs.

Silicon photonics solves this by sending information as pulses of light through fiber instead of electrons through metal. Light travels farther, carries more data, and uses less power over distance — exactly what a warehouse-sized AI cluster needs. The cutting edge of this shift is co-packaged optics, where optical components are built directly next to the switch chip rather than plugged in at the edge of the box, slashing power lost in translation.

The market opportunity is substantial. The optical transceiver market is projected to jump roughly 60 percent in a single year to about $26 billion in 2026, according to industry estimates.

Two stocks at the center of the shift

Coherent has deepened its partnership with Nvidia to develop next-generation silicon photonics, putting it at the center of the AI infrastructure buildout. Demand for its datacenter transceivers has surged as cloud giants expand capacity. The company trades on the New York Stock Exchange under ticker COHR.

Lumentum supplies the lasers and optical components that power data center networking and has been expanding capacity to meet demand that has outpaced supply. Barclays' upgrade noted that the company's improving operational performance relative to peers and idiosyncratic pricing benefits support a more favorable risk-reward profile. Lumentum trades on the Nasdaq under ticker LITE.

Both stocks carry risks. Optical component makers are cyclical and lumpy, with fortunes tied to a handful of large customers whose orders can swing sharply from quarter to quarter. Both have run up on AI enthusiasm, leaving valuations with little room for disappointment, and competition in optics remains fierce.

For investors, the move from copper to light is not a question of if but when. Coherent and Lumentum offer two focused ways to gain exposure to that transition, though position sizing should account for the optical business's inherent volatility.

This article is for informational purposes only and does not constitute investment advice.