Deutsche Bank named Lumentum Holdings and Coherent as its highest-conviction artificial-intelligence hardware picks on Monday, arguing that the market’s next growth wave centers on optical connectivity and lasers rather than graphics processing units alone, amid soaring demand across major data centers.
The explosive buildout of artificial intelligence is pivoting from raw compute power to the physical networks required to tie massive server farms together. According to Deutsche Bank analyst Gianmarco Conti, the industry has crossed a threshold where moving data matters just as much as processing it.
Why Optical Components and Lasers Take Center Stage
As hyperscalers expand data centers to train and run increasingly complex models, the hardware that routes light through fiber-optic cables becomes a critical operational bottleneck. Networking components that make and move light
are seeing demand, pushing manufacturers to capacity limits. Conti initiated coverage on eight hardware stocks with this thesis, placing Buy ratings on Lumentum Holdings and Coherent alongside Arista Networks, Cisco Systems, and Hewlett Packard Enterprise.
Lumentum and Coherent stand out as the highest-conviction recommendations because their hardware is mandatory regardless of which underlying chip architecture a data center deploys. Their specialized lasers and transceivers fit into both traditional pluggable optics and emerging co-packaged optics configurations. That universal necessity positions both firms as direct beneficiaries of infrastructure spending across the board.
Supply Constraints, Pricing Power, and Nvidia Investments
Market demand for optical hardware has outstripped manufacturing output. Both top picks are supply constrained, sold out, and raising prices, according to the bank’s analysis. To secure necessary hardware and support ongoing research, Nvidia has invested $2 billion in each company, locking in purchase commitments that validate their technological roadmaps.
Financial results from the companies underscore that narrative. Lumentum reported fiscal fourth-quarter revenue of $1.01 billion, with expectations for fiscal first-quarter revenue ranging between $1.225 billion and $1.275 billion alongside a non-GAAP operating margin approaching 40%. Coherent posted fiscal fourth-quarter revenue of $2.05 billion—a 34% increase year over year—while its non-GAAP gross margin expanded to 40.2%. Coherent operates as a vertically integrated supplier running from raw materials to finished transceiver modules, while Lumentum functions as a provider of optical components.
Cisco and Arista Capitalize on the Networking Bottleneck
Beyond specialized optics manufacturers, traditional networking heavyweights are drawing fresh institutional backing as data centers grapple with system-wide integration hurdles. Kevin Wollenweber, general manager of data-center and internet infrastructure at Cisco, noted the immense scale of the engineering challenge.
Kevin Wollenweber, general manager of data-center and internet infrastructure at Cisco, stated that while systems have compute, storage, all the graphics processing units, and everything else needed to connect, everything must operate as a single system, making the connectivity between those elements a critical bottleneck.
Cisco earned a Buy rating as the only large cap networker that spans all three layers of the hardware stack through its custom Silicon One chips, proprietary optical components, and enterprise routers and switches. Arista Networks also captured a Buy rating, backed by financial metrics that saw second-quarter revenue jump 37.7% to $3.04 billion and management guiding third-quarter sales to roughly $3.3 billion.
What Remains Uncertain for Hardware Investors
While the investment thesis for optical connectivity rests on backlog data and hyperscaler capital expenditures, analysts warn of distinct near-term risks. The primary question for market participants is whether current supply constraints and robust pricing power will persist as manufacturers scale up production capacity. Any sudden deceleration in hyperscaler spending or an unexpected acceleration in component supply could compress operating margins.
Investors are monitoring upcoming product launches and financial milestones to gauge whether aggressive guidance will materialize into sustained growth. Coherent prepares for its PhotonLink launch on September 21, while Lumentum’s upcoming fiscal first-quarter earnings report will test whether its elevated revenue targets are holding steady against supply chain realities.