AI Boom Sets Stage for Optical Giants: Jefferies Bullish on Coherent and Lumentum

Jefferies has expressed optimism about the future of optical communication giants Coherent (COHR.US) and Lumentum Holdings (LITE.US), as the increasing demand for faster interconnect speeds driven by artificial intelligence (AI) is poised to boost the data center market significantly. As a result, Jefferies has initiated coverage on both companies with a "buy" rating.

Blayne Curtis, the lead analyst at Jefferies, noted in a report to investors that Coherent's positive outlook does not depend on a flashy technological shift to gain market share. Instead, the company is already a leader in the current 400G and potentially the upcoming 800G transceiver markets. However, Coherent's performance has been hindered by a series of unsuccessful acquisitions, restructuring efforts, and unnecessary expenditures.

Curtis remains confident in Coherent's ability to manufacture 200G VCSEL products despite market concerns over their continued viability at such speeds. He also highlighted the steady growth of Coherent's EML/SiPho business. Nevertheless, Jefferies has lowered Coherent's price target from $135 to $110.

Coherent reported record revenue of $1.43 billion for the second quarter of fiscal 2025, a 27% increase year-on-year. CEO Jim Anderson attributed this growth to strong performances across multiple sectors, including significant growth in AI-related data communication transceivers, sequential telecom revenue growth for the second consecutive quarter, and continued expansion in several key industrial end markets.

Jefferies also revised the price target for Lumentum from $110 to $100. Curtis highlighted the contrast in narratives between the two firms. Lumentum's story centers around a technological transformation. As channel speeds move towards 200G (necessary for 1.6T), the existing VCSEL solutions have proven inadequate. The current alternative is EML technology, and Lumentum is one of only three producers in this laser segment. The EML laser market is sold out through the end of the year, supporting robust growth and positive pricing dynamics. Though Lumentum's historical competition in the VCSEL arena was less successful, its shift to EML aligns better with its core strengths.