The AI Bottleneck Most Investors Are Missing but Shouldn't

Most investors think the artificial intelligence revolution is about building smarter chips. And for good reason. Companies that provide the computing power behind AI, most notably Nvidia, have been some of the market's biggest winners in recent years.

But what if the next major AI opportunity isn't about processing information? What if it's about moving information?

As AI clusters grow larger and more powerful, moving data between processors is becoming almost as important as processing the data itself. And that's why a growing number of investors are paying attention to a little-known corner of the technology industry: optical networking.

Image source: Getty Images.

Bigger AI systems create bigger communication problems

Training today's most advanced AI models requires a huge number of processors working together simultaneously. While these processors perform enormous amounts of computation, they also spend significant time exchanging information. As such, every processor must constantly communicate with other processors across the network.

The problem is that as AI clusters become larger, the communication challenge grows rapidly.

For a long time, the technology industry focused primarily on building faster graphics processing units (GPUs). But many experts now believe that communication between processors is becoming one of the most important constraints on AI performance.

In other words, the bottleneck could shift from just making processors run faster to helping them communicate faster.

Why light may be the answer to the bottleneck

Traditionally, information inside data centers has been transmitted through electrical connections.

That approach has worked remarkably well for decades. However, as data volumes continue to rise, electrical systems face increasing challenges related to power consumption, heat generation, and bandwidth limitations.

That's one reason the industry is investing heavily in optical networking. Instead of transmitting information through electrical signals, optical systems use light.

The advantages can be significant. Optical technologies can move large amounts of data quickly while consuming less power and generating less heat than traditional electrical connections.

For AI companies building increasingly massive data centers, those benefits matter a lot. The result is growing interest in photonics and optical networking technologies that could become critical components of next-generation AI infrastructure.

The companies trying to build AI's communication network

Several companies are positioning themselves to benefit from this trend.

Large infrastructure providers such as Broadcom (NASDAQ: AVGO) and Marvell Technology (NASDAQ: MRVL) already play important roles in networking and connectivity. As AI spending rises, demand for their products could grow alongside it.

Investors are also paying attention to specialized optical companies such as Lumentum Holdings (NASDAQ: LITE) and Coherent (NYSE: COHR), which provide technologies and products used in high-speed optical communications.

Then there are smaller companies such as POET Technologies (NASDAQ: POET). Rather than building AI chips, POET is developing optical technologies to more efficiently move information through AI systems.

While these businesses take different approaches, they are all pursuing the same opportunity: helping solve AI's growing communication challenge.

The opportunity and the risk of investing in this sector

The investment thesis is straightforward: If AI spending continues to grow, the infrastructure needed to connect AI systems will likely grow as well.

Every new AI cluster requires processors, networking equipment, switches, optical modules, lasers, cables, and other supporting technologies. The companies that provide these components could benefit from continued investment over the years.

At the same time, investors should remember that identifying a trend is often easier than identifying the eventual winners. Not every company participating in the optical networking market will succeed. Some technologies will gain widespread adoption, while others may never achieve meaningful commercial scale.

This makes optical networking an exciting opportunity but also a highly uncertain one.

What does it mean for investors?

The first phase of AI investing rewarded companies that helped machines think. The next phase may reward companies that help those machines communicate.

As AI systems become larger and more complex, the ability to move information quickly and efficiently is becoming increasingly important. For investors searching for the next chapter of AI infrastructure spending, this may be one trend worth watching closely.

Lawrence Nga has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Broadcom, Coherent, Lumentum, Marvell Technology, and Nvidia. The Motley Fool has a disclosure policy.