Goldman Sachs Asset Management’s Sung Cho, co-head of public technology investing, argues the AI trade is rotating away from the graphics processor cycle toward companies wiring AI together, specifically optical and fiber equipment makers. His picks: Lumentum (NASDAQ:LITE | LITE Price Prediction) and Coherent (NYSE:COHR).
Cho’s case starts with a shift in workload mix. “One of the most important trends that we’re seeing in the market today is the shift from AI training, driving most of the compute, to AI inference, driving most of the compute,” he said. “Underneath that architecture is a completely different set of architecture, a completely different set of chips, optical equipment. And so the leadership is going to evolve and change as this transition happens.”
Why Connectivity Is the New Constraint
The physical footprint changes with inference. “As you go into inference, you need a lot more data centers that are closer to the customers that they’re serving. As a result, we’re just going to have to connect a lot of data centers,” Cho said. Inside those buildings, the wiring becomes the ceiling. “What’s happening is that compute speeds, the processor speeds are no longer the bottleneck. What the bottleneck is, is actually the ability to be able to have chip to chip communication, server to server communication. And right now, a lot of those connections are happening via copper. And that’s going to be replaced by optical as well,” he added.
The supply-side setup gives the trade duration. “One of the unique aspects of optical is that it’s extremely hard to bring new capacity online. And so the demand for optical and fiber is moving at an accelerating rate as a result of this transition. But the ability for the industry to bring capacity online is going to be somewhat limited and keep that duration of that trade,” Cho said. A semiconductor ETF is up 80% year to date but down 20% from its 52-week highs, while memory stocks tripled over the last couple of years despite similar bottleneck labels.
Lumentum: Margin Expansion Backing the Story
Lumentum’s fiscal Q3 2026 report, filed May 5, 2026, validated the thesis. Revenue reached $808.4 million, up 90.1% year over year, with non-GAAP EPS of $2.37 and non-GAAP operating margin expanding 700 basis points sequentially to 32.2%. CEO Michael Hurlston flagged optical circuit switches with backlog above $400 million and co-packaged optics with an incremental multi-hundred-million-dollar order deliverable in first half calendar 2027 booked. Details are in the company’s 8-K filing. Shares closed at $813.51 on August 10, up 120.71% year to date and 599.67% over one year.
Coherent: Scaling Capacity to Meet AI Demand
Coherent, now an S&P 500 constituent, posted Q3 FY2026 revenue of $1.81 billion, up 20.5% year over year, with Datacenter & Communications contributing $1.36 billion, up 40.6% YoY and now 75% of total revenue. Non-GAAP EPS was $1.41, with non-GAAP operating margin at 20.3%. CEO Jim Anderson said Coherent is on track to double internal InP output by year-end 2026 and more than double again by 2027. NVIDIA’s $2 billion investment anchors a partnership around laser and optical networking gear, with new engines such as CPO/NPO, optical circuit switches, and multi-rail solutions adding $20+ billion in incremental serviceable addressable market by calendar 2030. Shares finished at $325.15, up 76.17% year to date.
What to Watch Next
Sell-side positioning tracks Cho’s thesis. Lumentum carries 5 strong buy and 16 buy ratings with an analyst target of $1,125.93, while Coherent shows 4 strong buys and 13 buys against a $394.62 target. Reddit sentiment for LITE swung to very bullish score of 82 on August 4. Monitor InP capacity ramps, CPO order flow into calendar 2027, and whether hyperscaler capex holds through the inference build-out Cho describes.
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