Artificial intelligence has already created some extraordinary stock-market winners. Nvidia became one of the most important technology companies in the world by supplying the GPUs required to train and run increasingly powerful AI models.
But the next stage of the AI infrastructure boom may not be entirely about processors.
As AI data centres become larger, the challenge is increasingly about moving enormous quantities of data between GPUs, servers, racks and entire data centres quickly enough to keep expensive computing equipment working efficiently.
That is where optical networking enters the story.
Two companies attracting growing attention are Coherent Corp. (NYSE: COHR) and Lumentum Holdings (NASDAQ: LITE).
The investment thesis supplied for this article focuses on these two businesses because both manufacture advanced optical technologies needed to move information through AI infrastructure using light rather than relying entirely on traditional copper connections.
The story became considerably more interesting in March 2026 when Nvidia announced separate strategic agreements with both companies and committed $2 billion to each business.
Could Coherent or Lumentum become major beneficiaries of the next stage of the AI boom?
Let us examine the opportunity, the financial results and the risks.
Why AI’s Next Bottleneck Is Moving From Compute To Connectivity
AI Data Centres Need More Than Powerful GPUs
The first phase of the generative AI revolution was dominated by computing power.
Companies raced to acquire Nvidia GPUs because training increasingly large AI models required enormous amounts of processing capacity.
But possessing thousands of powerful processors creates another problem.
Those processors must communicate with each other.
A modern AI cluster can contain thousands or even hundreds of thousands of accelerators exchanging huge quantities of information. If the network cannot deliver data fast enough, expensive processors can spend time waiting instead of computing.
That makes networking performance extremely important.
Nvidia itself has increasingly highlighted optical connectivity as essential to building much larger AI factories. Its Spectrum-X and Quantum-X photonics technology integrates optical communications more closely with networking silicon.
Nvidia says its co-packaged photonics architecture can provide 3.5 times greater power efficiency, four times fewer lasers and significantly greater signal integrity compared with conventional approaches.
The company’s Vera Rubin platform is now taking this strategy further, with Nvidia saying Spectrum-X Ethernet Photonics is moving into production to support AI factories potentially containing enormous numbers of GPUs.
Why Fibre Optics Matters
Copper remains extremely useful for short electrical connections.
However, transmitting enormous amounts of information at very high frequencies through copper becomes progressively more difficult because of signal loss and power consumption.
Optical networking converts electrical signals into light and sends that light through fibre.
That allows data to travel rapidly with relatively low signal loss, making fibre increasingly important as AI clusters expand.
This creates demand for transceivers, lasers, modulators, optical switches and other photonic components.
Market forecasts vary considerably, so investors should avoid relying on one enormous headline number. One August 2026 industry estimate valued the optical transceiver market at approximately $15.4 billion in 2026 and projected it could reach approximately $29.3 billion by 2031, representing annualised growth of around 13.7%.
Even if growth comes in below the most optimistic forecasts, optical networking could remain an important long-term infrastructure market.
Indium Phosphide Could Become Increasingly Important
One particularly interesting material is indium phosphide, commonly abbreviated to InP.
Traditional silicon is excellent for computation, but specialised compound semiconductors such as InP are extremely useful for creating lasers and other high-performance photonic devices.
As AI networking moves towards 800G, 1.6T and eventually even faster connections, manufacturers capable of producing advanced photonic devices at scale could become increasingly strategically important.
That is where Coherent and Lumentum become particularly interesting.
Coherent Stock And The Case For Scale
AI Infrastructure Is Transforming Coherent
Coherent is much larger and more diversified than many investors may initially realise.
For its fiscal year ended June 30, 2026, Coherent generated approximately $7.12 billion in total revenue, compared with $5.81 billion the previous year.
More importantly, its Datacenter and Communications division generated approximately $5.27 billion, up from about $3.76 billion one year earlier.
That means roughly three quarters of Coherent’s annual revenue now came from this segment. Management specifically attributed growth partly to strong AI data-centre demand.
Its fiscal fourth quarter was equally impressive.
Revenue reached approximately $2.05 billion, increasing 34% year over year. GAAP gross margin reached 38.5%, while non-GAAP earnings were $1.74 per share.
This is no longer simply a speculative story about what AI might eventually do for Coherent. AI infrastructure is already materially affecting the company’s financial performance.
The Six-Inch InP Advantage
Possibly Coherent’s most interesting competitive advantage is its manufacturing scale.
Historically, indium-phosphide devices have often been manufactured on relatively small wafers because the market was much smaller than mainstream silicon semiconductors.
Coherent has developed a six-inch InP manufacturing platform.
The company says transitioning to larger six-inch wafers can produce approximately four times as many devices per wafer while reducing die costs by more than 60%.
Coherent is now expanding its Sherman, Texas facility. The planned development is expected to double the site’s manufacturing space and ultimately increase wafer-production capacity approximately fourfold.
During a period when demand for optical technology is rising rapidly, manufacturing capacity can become a competitive advantage in its own right.
Nvidia Just Validated The Strategy
On March 2, 2026, Nvidia announced a multiyear strategic agreement with Coherent.
The agreement included a multibillion-dollar purchase commitment together with future access and capacity rights for advanced optical and laser products.
Nvidia also invested $2 billion directly into Coherent to support research, manufacturing capacity and operations.
That does not guarantee Coherent will be a successful investment.
But Nvidia committing billions of dollars while also securing future product capacity is a significant commercial validation of the importance of optical technology within future AI infrastructure.
Lumentum Stock And The Case For Efficiency
Lumentum Is Growing Even Faster
If Coherent’s strength is manufacturing scale and vertical integration, Lumentum’s recent financial growth is difficult to ignore.
For fiscal 2026, Lumentum generated approximately $3.01 billion in revenue, compared with $1.65 billion during fiscal 2025.
That represents growth of approximately 83% in just one year.
Its fourth-quarter numbers were even more dramatic.
Revenue reached approximately $1.01 billion, increasing 109% year over year.
Non-GAAP gross margin reached an impressive 50.4%, while non-GAAP operating margin reached 36.6%.
The company also forecast fiscal Q1 2027 revenue between approximately $1.225 billion and $1.275 billion, suggesting demand remained extremely strong entering the new financial year.
Lumentum Sits Close To The Laser Opportunity
Lumentum manufactures several technologies used inside optical communications systems.
An important category is the electro-absorption modulated laser, or EML.
These devices combine a laser with an integrated modulator capable of rapidly controlling the optical signal used to transmit information.
Lumentum’s 100G and 200G EML technologies are already used within 400G and 800G optical modules and provide a pathway towards 1.6T connectivity.
Fiscal 2026 provides evidence that demand is translating into revenue.
Lumentum reported that growth in its components business was heavily driven by increasing shipments of laser chips and assemblies supporting intra-data-centre, data-centre interconnect and long-haul applications. Its cloud transceiver product revenue increased by more than 173%.
Nvidia Made The Same $2 Billion Bet
Nvidia also invested $2 billion in Lumentum on March 2, 2026.
The agreement included a multibillion-dollar purchase commitment and future capacity rights for advanced laser components.
There is another interesting difference between the businesses.
Lumentum generated approximately $751 million in operating cash flow during fiscal 2026 while spending about $451 million on capital expenditure.
That suggests the business is currently generating meaningful cash while expanding production.
For investors worried about the cost of scaling advanced semiconductor manufacturing, that is an important number to watch.
Coherent Vs Lumentum Which AI Optics Stock Looks Stronger
The Case For Coherent
Coherent arguably offers the stronger vertically integrated manufacturing story.
It participates across a broad range of photonics technologies and possesses potentially valuable six-inch InP production capabilities.
Its Datacenter and Communications revenue is already above $5 billion annually, and Nvidia’s purchase commitment gives Coherent greater visibility as it expands capacity.
If shortages in advanced optical components continue, Coherent’s manufacturing scale could become increasingly valuable.
However, expansion requires substantial investment.
Manufacturing facilities must be built, equipment installed, processes qualified and production yields maintained. Unexpected delays could reduce returns on that spending.
The Case For Lumentum
Lumentum arguably offers the more explosive recent growth story.
Revenue rose 83% during fiscal 2026, its latest quarter more than doubled year over year, and non-GAAP gross margins exceeded 50%.
Its exposure to high-speed lasers, cloud transceivers and optical switching gives it several ways to benefit from expanding AI infrastructure.
The company is also producing substantial operating cash flow relative to current capital expenditure.
But rapid growth creates its own risks.
AI infrastructure spending cannot grow at extraordinary rates forever, and suppliers exposed heavily to hyperscale data-centre customers could experience significant volatility if spending slows.
The Risks Investors Should Not Ignore
Neither Coherent nor Lumentum should be considered a guaranteed route to wealth.
Both depend heavily on continued investment in AI infrastructure.
Competition could increase. New optical architectures could change which components are required. Manufacturing expansion could create temporary oversupply. Customer concentration can increase bargaining power for companies such as Nvidia and other hyperscalers.
There are also geopolitical and supply-chain risks surrounding specialised semiconductor materials.
Perhaps the biggest risk is expectations.
Once investors begin expecting extraordinary growth, even excellent companies can experience severe share-price declines simply because results are slightly weaker than anticipated.
A great company and a great investment are not always the same thing at every valuation.
What This Means For My Journey From Security Guard To Financial Freedom
I Am Looking Beyond The Obvious AI Winners
One lesson I continue learning on my journey from Security Guard to Financial Freedom is that enormous economic transformations normally create opportunities far beyond the companies receiving the most attention.
During the AI revolution, Nvidia has understandably dominated the headlines.
But an AI data centre requires much more than GPUs.
It needs electricity, cooling, memory, networking, storage, fibre, transceivers, lasers, switches and enormous physical infrastructure.
Sometimes the most interesting opportunities can appear one or two layers beneath the obvious winner.
Coherent and Lumentum are good examples.
Instead of competing directly with Nvidia, they could potentially benefit from Nvidia and other hyperscalers building ever-larger AI systems.
Nvidia’s Investments Have My Attention
The development that makes this story particularly interesting to me is Nvidia investing $2 billion in each company.
Nvidia is not merely commenting on optical networking.
It is committing capital, securing future capacity and entering long-term commercial relationships.
That tells me optical networking deserves a place on my research list.
It does not mean I should automatically buy either company.
My responsibility as an investor is to study revenue growth, profitability, free cash flow, valuation, competition, customer concentration and technological developments before committing money.
Could These Stocks Create Millionaires By 2029
Possibly.
But that should never be the investment thesis.
Coherent and Lumentum would need extraordinary business execution and investors would still need to purchase them at sensible valuations for life-changing returns to occur.
The more important question is whether optical connectivity is becoming a critical bottleneck in AI infrastructure.
The evidence increasingly suggests that it is.
Coherent generated more than $5.2 billion from Datacenter and Communications during fiscal 2026. Lumentum grew annual revenue by more than 80%. Nvidia invested $4 billion across the two companies and entered strategic supply agreements with both.
Those are substantial developments.
For now, Coherent may have the stronger manufacturing-scale advantage, particularly through its six-inch indium-phosphide platform.
Lumentum may have the stronger near-term financial momentum, thanks to exceptionally rapid revenue growth, high margins and strong operating cash generation.
Rather than trying to predict with certainty which stock will create the greatest return by 2029, I believe the smarter approach is to continue watching both businesses as the AI infrastructure revolution develops.
My journey toward financial freedom is not about finding one magical stock.
It is about learning how industries change, recognising long-term trends, controlling risk and gradually building assets capable of working for me.
If optical networking becomes one of the next major bottlenecks of artificial intelligence, Coherent and Lumentum could be two companies worth watching very closely.
From Security Guard To Financial Freedom.
Disclaimer
This article is for general informational, educational, and entertainment purposes only and does not constitute financial, investment, tax, or professional advice. I am not a financial adviser, and nothing in this article should be interpreted as a recommendation to buy, sell, or hold Coherent, Lumentum, Nvidia, or any other investment.
All investments involve risk, and the value of shares can rise as well as fall. You may receive back less than you originally invested. Past performance is not a reliable indicator of future results, and projections, forecasts, analyst expectations, market estimates, and growth assumptions may prove inaccurate.
Any figures, company results, market data, or forecasts mentioned in this article were based on information available at the time of writing and may change. Always carry out your own independent research and consider your personal financial circumstances, investment objectives, risk tolerance, and investment time horizon before making financial decisions.
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