Nvidia's flagship GPU Tech Conference next week is expected to provide a look at the company's next-generation chip architectures. But another artificial-intelligence trend component will also be in the spotlight: optical interconnects, which allow clusters of GPUs to communicate with each other.
According a Bank of America note published Monday, the optical-interconnect market could quadruple in size to $73 billion by 2030 as AI workloads require capabilities beyond traditional copper conductors.
Analyst Vivek Arya expects Nvidia (NVDA) to lead this transition, potentially becoming the first major vendor to swap out traditional copper-based server backplanes for co-packaged optics - a shift that moves light-speed connectivity directly onto the processor.
The "annual cadence in compute" from Nvidia and chip makers such as Broadcom $(AVGO)$ is "necessitating a corresponding scaling of optical interconnects," Arya wrote.
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While Nvidia and Broadcom are the "larger incumbents incorporating optics to strategically improve their portfolio," Arya identified Marvell Technology $(MRVL)$ and Macom Technology Solutions Holdings $(MTSI)$ as "purer-play" beneficiaries of this trend. Marvell is favored for its exposure to both optics and custom chips, and for an attractive 23x forward earnings multiple. Meanwhile, Macom has "underappreciated" exposure to optical components like photodetectors and lasers as well as "higher quality" earnings and gross margins, Arya wrote.
The Optical Fiber Communications Conference and Exhibition is also happening next week, and Arya expects it will offer updated commentary on the supply and demand environment for optical lasers and co-packaged optics adoption. Last week, Nvidia signed multiyear agreements with Lumentum Holdings $(LITE)$ and Coherent $(COHR)$ to purchase advanced laser and optical-networking products.
Shares of Lumentum and Coherent have surged 68.6% and 31.4% so far this year. Arya remains neutral on these names becasuse of their premium valuations, but he believes they could see earnings upside due to market expansion and news from OFC. Arya's analysis suggests Lumentum could generate $35.30 in earnings per share by 2028 - more than 50% above the Wall Street consensus of $23.
Lumentum and Coherent are both slated to be added to the S&P 500 index SPX later this month.
Traditional providers of copper wiring such as Credo $(CRDO)$ will still benefit from the shift to optical interconnects, according to Arya. He sees a "distinct role" for Credo's active electrical cables as an attractive multibillion-dollar market opportunity. Trading at 24x forward earnings, Credo's stock is a "compelling" opportunity, Arya wrote.
Nvidia's roadmap holds "profound influence over the direction of the optics industry," Arya added, cautioning that relevant stocks could be subject to volatility as a result. So far this month, shares of Lumentum and Coherent are down 11.3% and 6.2%, while shares of Macom are down 13.6%, which Arya attributes to investor repositioning and uncertainty going into next week's trade shows.
"Despite the volatility, we expect robust broad-based, multiyear growth across all suppliers," Arya wrote.
