The rally in optical stocks has lost some of its fire, but that just means investors have the chance to score better deals on quality stocks, according to a J.P. Morgan analyst.
Despite a strong start to the year on enthusiasm for the data-center buildout, shares of Lumentum Holdings $(LITE)$ and Coherent $(COHR)$ are trading about 15% and 17%, respectively, below highs reached earlier this month, J.P. Morgan analyst Samik Chatterjee said in a note Thursday.
Chatterjee said the recent pressure relates to "limited summer catalysts" that have been made worse by concerns around delays in the adoption of co-packaged optics. The technology, known as CPO, integrates optical transceivers and processors in the same package, and is touted for improving chip speed and power efficiency due to using light instead of electricity to move data.
To Chatterjee, those fears are "likely overblown" given that the ramp of Nvidia's scale-out CPO looks to be on track, he said, citing discussions with suppliers.
Shares of Coherent and Lumentum soared earlier this month after Nvidia CEO Jensen Huang said fellow optical supplier Marvell Technology $(MRVL)$ could be the next $1 trillion company. And they bounced 2.5% and 4.3%, respectively, in Thursday trading.
Another concern for investors has been that near-packaged optics, which involve putting an optical component close to a processor, could hinder CPO adoption. Chatterjee said any impact would likely be limited, however, as both NPO and CPO would require lasers from Coherent and Lumentum.
The companies announced multiyear agreements with Nvidia earlier this year that include multibillion-dollar purchase commitments for their advanced laser systems and other optical technology.
Additionally, customers beyond Nvidia are looking into NPO and CPO solutions, Chatterjee said, which would be additive to guidance for the coming years.
The "outsized pullback in shares" from those worries make for "a more interesting setup emerging as once-lofty optical premiums begin to look more palatable to investors," Chatterjee said in his Thursday note.
He said shares of Coherent and Lumentum are trading at about 25 times consensus estimates for 2028 earnings, even as Wall Street expects earnings growth of more than 40% in that period.
In Chatterjee's view, both optical suppliers look more attractive than before, and upside will likely continue for CPO and other optical-networking components that the companies offer.
