Optics and photonics stocks joined the broader tech rally in Friday afternoon trading, with Applied Optoelectronics (NASDAQ:AAOI) stock up 7%, Coherent (NYSE:COHR | COHR Price Prediction) stock rising 7%, and Lumentum (NASDAQ:LITE) shares adding 5%. The moves come as the NASDAQ 100 extends gains for a second consecutive session, having jumped 3% on Thursday before climbing another 0.81% today.
The iShares Semiconductor ETF (NASDAQ:SOXX) is up 1.31% to $511.13 in Friday afternoon trading, reflecting the risk-on sentiment spreading through the semiconductor and related technology sectors. However, the aforementioned optics/photonics names are outpacing the broader semiconductor ETF, underscoring the speculative enthusiasm surrounding companies tied to AI data center infrastructure.
The Optics Sector’s AI-Driven Growth Story
The optics and photonics sector has emerged as a critical enabler of AI data center buildouts, with optical interconnects and high-speed transceivers becoming essential for moving massive amounts of data between AI chips and across data centers. Industry research firm LightCounting estimates that the AI cluster optics market reached $16.5 billion in 2025 and will hit $26 billion in 2026, representing 60% growth in a single year.
Applied Optoelectronics has capitalized on this trend, with its datacenter segment revenue more than doubling in recent quarters on demand for 800G transceivers. Lumentum’s fiscal Q3 2026 revenue came in at $808.4 million, up 90% year over year, backed by an optical circuit switch backlog exceeding $400 million. Meanwhile, Coherent’s Datacenter and Communications segment grew 41% to $1.36 billion in fiscal Q3 2026, now representing 75% of total revenue.
Valuation Concerns Loom Large
Despite the compelling growth narrative, the valuations on these optics stocks leave little room for error. Coherent trades at a TTM P/E ratio of 127.17x, while Lumentum carries a TTM P/E ratio of 128.24x. These multiples are highly elevated even by growth-stock standards and reflect sky-high expectations for continued explosive revenue and earnings growth.
Applied Optoelectronics doesn’t even have a TTM P/E ratio, as the company remains unprofitable on a trailing 12-month basis. Applied Optoelectronics stock has surged 176% year to date, but the company’s path to sustained profitability remains uncertain despite strong revenue growth in its datacenter segment. Investors buying at these levels are betting heavily on future execution and market-share gains.
The Case for Diversification via SOXX
The iShares Semiconductor ETF offers diversified exposure to the semiconductor sector with a TTM P/E ratio of 36.1x, which is far more reasonable than the triple-digit multiples on Coherent and Lumentum. The iShares Semiconductor ETF holds positions in a range of semiconductor-sector leaders, providing broader exposure to the AI infrastructure theme without concentrating risk in any single niche.
The SOXX ETF has also participated in the recent rally, though its gains have been more moderate than the optics names. This reflects the fund’s diversified nature and the inclusion of more established, profitable companies with lower valuation multiples. For investors seeking exposure to the semiconductor and AI theme with less single-stock risk, the ETF approach could prove more suitable.
What Can Investors Do Now?
The optics/photonics sector’s long-term prospects tied to AI data center expansion remain intact, with industry forecasts pointing to continued strong growth through 2030 and beyond. Applied Optoelectronics, Coherent, and Lumentum each stand to benefit if hyperscaler capital expenditure on AI infrastructure continues at the current pace. However, the high valuations of Coherent and Lumentum, combined with Applied Optoelectronics’ lack of profitability, introduce significant downside risk if growth slows or competition intensifies.
The SOXX ETF presents a more balanced alternative for investors who want exposure to the AI and semiconductor theme without betting heavily on any single company’s execution. The fund’s diversified holdings and more reasonable valuation multiple could provide a smoother ride through the sector’s inevitable ups and downs. Market watchers may want to check for signs of sustained data-center spending and optical transceiver demand before committing significant capital to these high-multiple names.
Investors should consider keeping their position sizes modest if they’re considering owning shares of Applied Optoelectronics, Coherent, Lumentum, or the SOXX ETF at their current levels. The optics/photonics sector’s growth potential is real, but the speculative valuations on these stocks demand prudent risk management in an environment where sentiment can shift quickly.
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