Nvidia Gets The Headlines. But This Optical Networking Stock Was The Bigger AI Surprise

Nvidia (NASDAQ: NVDA) dominates many headlines about the booming artificial intelligence (AI) market. As the world's largest producer of data center GPUs for training AI algorithms, it's still selling the best picks and shovels for the AI gold rush.

Yet over the past 12 months, an oft-overlooked optical networking stock outperformed Nvidia by a wide margin. That stock was Coherent (NYSE: COHR), which surged more than 400% and crushed Nvidia's near-50% gain. Let's see why the AI tailwinds propelled Coherent's stock higher -- and if it can stay ahead of Nvidia and the other AI leaders.

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What does Coherent do?

Coherent, which was known as II-VI until it acquired the original Coherent and inherited its brand and ticker in 2022, is the world's leading photonics company. It manufactures optical transceivers and components that convert electronic data into light signals, transmit them through fiber-optic cables, and convert them back into accessible data.

In the past, data centers mainly used traditional copper wires to transfer their data between servers. But today, those wires are too slow and generate too much heat to handle the soaring data needs of the expanding cloud infrastructure and AI markets. Those limitations are driving more data center operators to upgrade their networks with Coherent's faster optical devices.

Most of Coherent's revenue comes from its optical business, which has become its core growth engine as the AI market expands. It also produces manufacturing lasers and specialty chips, but those businesses aren't delivering nearly as much growth as its optical business.

How fast is Coherent growing?

In fiscal 2025 (which ended last June), Coherent's revenue rose 23% as data centers upgraded their infrastructure to handle the latest generative AI applications. From fiscal 2025 to fiscal 2028, analysts expect its revenue to grow at a 30% CAGR. They expect its EPS to turn positive in fiscal 2026 and grow at a 52% CAGR over the following two years.

That growth should be driven by its new ultra-fast 800G, 1.6T, and next-generation 3.2T optical technologies. However, Coherent's stock isn't cheap at 63 times its fiscal 2027 earnings (and 51 times its forward adjusted earnings). Nvidia trades at just 22 times its projected earnings for fiscal 2027 (which ends next January) -- but analysts still expect its revenue and EPS to grow at 46% and 45%, respectively, from fiscal 2026 to fiscal 2029.

Coherent's stock soared as it was revalued from a slow-growth optical components and industrial lasers maker into a high-growth AI play. Still, its high valuation could cap its upside potential. While it's still a promising long-term play on the AI-fueled growth of the optical networking market, I think it could underperform Nvidia for the rest of this year.

Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Coherent and Nvidia. The Motley Fool has a disclosure policy.