3 AI Optical Networking Stocks Positioned for the Data Center Buildout
AI-driven networking companies have been waiting for a sign to either continue to pull back or reinvigorate a bull run, but Ciena Corp.'s (NYSE: CIEN) Q3 earnings report may invite more questions than answers. Despite strong earnings and revenue, coupled with continued robust demand for AI and optical networking, shares fell after the report. The culprits? An expectation that margins could moderate after receiving tariff refund benefits, and a general reckoning with the sky-high expectations investors have for the industry, may have contributed.
Still, Ciena's report offers a fresh read-through on AI-based networking demand that may be helpful for investors seeking diversified exposure. While Ciena provides optical networking systems and platforms, rivals Lumentum Holdings Inc. (NASDAQ: LITE) and Coherent Inc. (NYSE: COHR) offer optical components and transceivers. While not the strongest buy signal, Ciena's report does suggest that the recent sell-off may have improved the risk/reward calculation for these companies.
A Closer Look at Ciena's Earnings
Ciena's top and bottom lines were strong on paper: adjusted earnings per share (EPS) of $2.11 on almost $1.7 billion in revenue, both comfortably above what analysts had predicted. Adjusted operating margin climbed to 22.5%, a record for the company. The EPS growth, in particular, was notable, as it was a full 215% higher than the figure from just one year ago.
Demand continues to significantly outpace supply, resulting in a backlog of $8.5 billion for Ciena (an increase of $800 million from last year). The company expects this to continue and sees a backlog of more than $10 billion by the end of the fiscal year. This helped drive a forecast of 30% year-over-year (YOY) revenue growth for fiscal 2027.
What May Be Behind Ciena's Plunge
After all that good news, Ciena shares still fell in the hours immediately following the earnings release and remain down more than 15% over the five days surrounding it. Digging deeper into the report, in-line guidance for fiscal Q4 may not have met analysts' lofty expectations for the company's growth trajectory. Further, just two major customers accounted for 42% of the firm's quarterly revenue, leaving it highly vulnerable should one or both of those clients shift their business elsewhere or otherwise reduce their orders.
Notably, Ciena's most recent share price drop is somewhat unique compared to the broader industry. One of the company's primary competitors, Arista Networks (NYSE: ANET), is down just 1.8% over the last five days; zooming out to the last month, CIEN shares have plunged by 22% while ANET is actually up close to 1%. This might suggest that Ciena's performance of late has been the result of factors internal to the company, rather than industry-wide.
Lumentum and Coherent: A Different Perspective on the Industry With Unique Benefits
Both Lumentum and Coherent are off their earnings cycles as of early September, forcing investors to wait for the latest updates on their financial performance. However, these firms offer a different perspective on the industry thanks to their unique positions in the value chain. Both companies market photonic tools for use in AI-cluster connectivity applications. Demand across the space has been stellar, but there is a question as to whether the frenzied pace can continue.
Hyperscaler spending on photonics is robust, with some estimates placing AI hyperscaler capital expenditures at an estimated $500 billion or more this year alone. Because Lumentum and Coherent provide vital hardware for these applications, they have strong potential as pick-and-shovel plays that benefit from industry-wide demand because virtually all companies in the space will need their products.
The shift toward 800G and 1.6T optical interconnects in the coming years may be a major driver of continued demand for both companies. Each allows companies to significantly expand bandwidth in order to support larger clusters and connectivity tools. At this point, 800G is the primary volume product, but investors looking at a longer time horizon will expect 1.6T to impact hyperscalers in the years to come.
Across this widespread technological upgrade, Lumentum may be the stock to watch. It is the most pure-play photonics firm on this list and may therefore be best positioned to benefit from upgrades at scale. On the other hand, Coherent has broader exposure that also includes lasers used for industrial and semiconductor manufacturing, compound semiconductor materials, and more.
All three of these companies enjoy bullish forecasts from analysts across Wall Street, but investors will want to distinguish them for their different roles in the ongoing data center buildout. Ciena's latest earnings report may signal some turbulence, but the company has plenty of strengths. Lumentum and Coherent, on the other hand, may be poised to skyrocket as their products become even more vital.
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