Chipmakers like Nvidia (NASDAQ:NVDA | NVDA Price Prediction) were the early winners in the artificial intelligence (AI) boom, as companies scrambled to acquire advanced processors for training and running AI models. Their revenue surged from this demand, and they continue to offer strong potential as AI evolves.
However, other sectors are now coming into focus as the downstream effects of the revolution play out. One such stock that stands out is Lumentum Holdings (NASDAQ:LITE) as it is a key player poised to benefit from this next phase, driven by the need for efficient data transmission in sprawling AI networks.
Bringing AI’s Optics Phase Into View
A recent report from JPMorgan Chase highlights a multi-year upcycle in the optics sector, fueled by rising hyperscaler capital expenditures and the push for faster data communication technologies. The firm projects hyperscaler spending to reach about $533 billion in 2026, up significantly from prior years, as major cloud providers like Microsoft (NASDAQ:MSFT) and Amazon (NASDAQ:AMZN) build out AI infrastructure. This phase emphasizes the “downstream effects” of AI, where the initial chip rush gives way to scaling networks that handle massive data flows.
Optics involves components like lasers and transceivers that transmit data using light over fiber cables, replacing slower copper wires. As AI models grow larger, data centers require more interconnections between servers, creating “east-west” traffic that optics manage efficiently. JPMorgan notes the 800G and higher-speed datacom market is growing at over 40% annually through 2030, potentially reaching $44 billion. This growth stems from supply shortages in key materials like indium phosphide lasers, which are expected to continue into 2027, allowing suppliers to raise prices by 10% or more starting in early 2026.
The report also points to emerging technologies like co-packaged optics, where optical elements are integrated directly with chips to reduce power use and boost density. Adoption is set to ramp modestly in 2026 before accelerating in 2028, adding up to $10 billion in market value by 2030.
Optical circuit switching, which reroutes data paths dynamically, is another driver, with applications in AI clusters like Google’s systems. These advancements address bottlenecks in power consumption and bandwidth, making optics essential for sustainable AI expansion.
Why Lumentum Lights the Way Forward
Lumentum is positioned as a major beneficiary due to its expertise in high-speed optical components. In its fiscal second quarter, the company reported revenue of $665.5 million, a 65.5% increase year over year, with non-GAAP operating margins expanding to 25.2%. Over 60% of this revenue came from cloud and AI segments, reflecting direct ties to hyperscaler demand. GAAP net income reached $78.2 million, or $0.89 per diluted share.
Guidance for the third quarter projects revenue between $780 million and $830 million, implying over 85% year-over-year growth. This outlook is supported by a backlog exceeding $400 million in optical circuit switches and a multi-hundred-million-dollar order for co-packaged optics, slated for delivery in the first half of 2027. Lumentum aims for $100 million in quarterly optical circuit switch revenue by December.
The company’s vertical integration, enhanced by its 2023 acquisition of CloudLight, allows it to produce complete transceiver modules, improving margins and supply control. Lumentum leads in electro-absorption modulated lasers — crucial for 200G-per-lane speeds in 800G and 1.6T transceivers. The shift to 1.6T is accelerating faster than expected, with revenue from these products layering in during the third quarter. Higher speeds bring better pricing, with 200G lasers costing about twice as much as 100G versions, while production costs rise less sharply.
Lumentum’s partnerships with hyperscalers position it for sustained demand. CEO Michael Hurlston stated during the earnings call that the company is “a foundational engine of the AI revolution,” with its technology powering nearly every AI network either directly or through suppliers. Analysts like those at JPMorgan have raised price targets to $350, citing these “scale-across” opportunities where Lumentum expands its customer base and product lines.
Key Takeaway
While the AI boom appears mature after years of rapid progress, estimates suggest the total buildout could exceed $5 trillion over the coming years, indicating it’s still in the early stages. Beyond chipmakers, opportunities abound in enabling technologies like optics. That makes Lumentum well-placed to capture this growth through its leadership in critical components, strong backlog, and margin improvements, making it a compelling option for the AI infrastructure wave.
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