Meet the Under-the-Radar AI Stock Poised to Outgrow Nvidia

The artificial intelligence revolution was ignited thanks to the innovations Nvidia (NASDAQ: NVDA) brought to market. Not only did Nvidia CEO Jensen Huang design sophisticated graphics processing units capable of massive parallel processing, but Nvidia's CUDA software also enabled those GPUs to process huge amounts of data, enabling generative AI as we know it today.

As that revolution develops, other parts of the AI infrastructure supply chain are now seeing hypergrowth, including memory and central processing units (CPUs). However, one particular connectivity technology is poised to outgrow everyone in the space over the next few years, including Nvidia.

Here's the company at the center of that technology.

Lumentum momentum

While individual GPUs are capable of massive parallel processing, the most advanced AI systems require many GPUs within a data center and even across multiple data centers to function as a single unit, or "brain." That requires a massive amount of lightning-fast connectivity, which means optical fiber connections.

Not only do these optical fiber connections need to keep pace with GPU growth, but optical fiber will soon displace traditional copper-based connections in data centers as well.

Traditionally, optical fiber was used primarily for long-distance data communication, particularly in the telecom industry, to connect data centers to consumers. However, connections within server racks and inside the servers themselves were usually handled via copper, which was more efficient for short-distance data transport.

But at high speeds, copper connection signals degrade over sufficiently long distances. That means to handle the massive amount of high-speed data transfer required by advanced AI clusters, companies will have to employ more optical fiber for shorter connections, such as those between clusters in a data center (scale-out), between servers within a rack (scale-up), and even within the rack itself (scale-in).

How much growth are we talking about here? Lumentum (NASDAQ: LITE) is a specialist and leader in optical technology, positioned at the center of this transition. At a recent industry conference, Lumentum's Vice President of Investor Relations, Kathy Ta, elaborated on the massive growth opportunity ahead:

If we think of the Data Center Interconnect or the telecom market being sort of a 1x multiple, what we are seeing now for scale-across is probably 10x of what we saw for DCI. What we are seeing now for scale-out is probably 10x of what we are seeing for DCI. What we are seeing for scale-up, starting in the second half of 2027 for the first instance of CPO [co-packaged optics] going to scale-up, is probably 3x to 4x above the 10x that we are seeing for scale-out. Then, when all of the scale-up goes optical, it is probably a full 10x above the 10x scale-out. ... I think you may have a question for us later on scale-in. There is another 10x multiple there, so it is mind-boggling about what we are enabling in terms of compute.

Image source: Getty Images.

Given this potential, it's no wonder that Nvidia invested $2 billion in Lumentum back in March. Not only should the close technology collaboration benefit future Nvidia systems, but the investment is also likely to pay off handsomely as optical connections replace copper over the next several years.

The power of compounding

Pay attention to what Ta is saying. A market multiplying 10 times and then 3 times doesn't lead to a 13 times growth; it's 30 times. If all "scale-up" goes fully optical in the bullish scenario she envisioned, or another 10 times on top of the 10 times growth in scale-across, that's a total addressable market growth of 100 times. And that's even before the "scale-in" scenario, which may be further out.

No doubt, companies like Nvidia should still grow very fast in the age of AI. However, replacing copper with optical components adds a layer of compound growth on top of the already strong growth in AI. And as Albert Einstein once quipped, "Compound interest is the eighth wonder of the world."

So for those looking for the next great growth stock, it may just come from companies like Lumentum and its peers involved in fiber-optic lasers, modules, and packaging. While all hardware companies involved in the AI build-out should succeed in the AI age, companies that supply optical fiber technology should grow faster than others, provided they execute effectively and have sufficient supply.

Billy Duberstein and/or his clients have no positions in any of the stocks mentioned. The Motley Fool has positions in and recommends Lumentum and Nvidia. The Motley Fool has a disclosure policy.