Jefferies is bullish on optical communication giants Coherent (COHR.US) and Lumentum (LITE.US), which are set to soar on the wind of AI data centers.

Jefferies stated that as AI continues to drive faster interconnection speed demand, data centers are expected to see significant growth, leading to an increase in network demand.Based on this, the investment firm has initiated coverage on coherent (COHR.US) and lumentum holdings (LITE.US) and assigned them a "buy" rating.Analysts led by Blayne Curtis of Jefferies said in an investor report: "Coherent's bull case is not dependent on some dazzling technology transformation driving market share, in fact, quite the opposite. Coherent is dominant in the current 400G (and likely 800G) transceiver market, but a series of failed acquisitions, restructuring, and overall unnecessary spending have weighed on its performance."Curtis added: "Despite the market's concerns about the continued viability of VCSELs at 200G/channel, the company remains confident in its ability to produce 200G VCSEL products, while its EML/SiPho business is growing steadily."However, Jefferies reduced its target price on Coherent to $110 from $135.Coherent reported record revenue of $1.43 billion in the second quarter of fiscal 2025, up 27% year-on-year.Coherent CEO Jim Anderson said on the earnings call: "This growth was driven by strong performance across multiple areas, including a significant increase in AI-related data communication transceivers, a second consecutive quarter of sequential growth in telecom revenue, and continued expansion in several key industrial end markets."At the same time, Jefferies reduced its target price on Lumentum to $100 from $110.Curtis noted: "In contrast to Coherent, Lumentum's narrative is centered around technology transformation. As the channel speeds move towards 200G/channel (1.6T required), existing VCSEL solutions have proven ineffective. The primary option now is EML, and Lumentum is one of only three laser producers. The EML laser market is sold out through the end of the year, driving strong growth and positive pricing dynamics. While Lumentum's history in the VCSEL space has not been successful, the transition to EML positions it more in line with its expertise."