The Next Big AI Market Bottleneck Is Here: 8 Stocks to Play the Boom in Optics

The pace of artificial intelligence (AI) innovation continues to accelerate, and as it does, the need for faster connectivity is intensifying. This is leading to a shift in the data center away from traditional copper wiring to optical connections that are both faster and more energy-efficient. And rising demand for optical hardware is also creating what could be the next big bottleneck in the AI infrastructure build-out.

Let's look at eight AI stocks you could buy to play the optics trend, starting with chip companies and moving on to companies that provide the physical, campus, and wide-area networking (WAN) layers of optical infrastructure.

Optical DSPs

Marvell Technology (NASDAQ: MRVL) is the market leader in optical DSPs (digital signal processors), which serve as the brains inside high-speed optical transceivers. DSPs are the main chips used to take electrical signals from AI chip clusters and convert them into light, thus allowing the data to be transmitted through optical systems. Nvidia views Marvell's tech as so important to the data center tech stack that it made a $2 billion investment in the company and partnered with it to integrate Marvell's optical networking into its NVLink ecosystem.

Broadcom (NASDAQ: AVGO) is another big player in the optical DSP space, and its growth in this business is feeding off its large custom chip business.

Photonic lasers

Lumentum Holdings' (NASDAQ: LITE) laser tech is critical to preventing bandwidth bottlenecks in AI data centers. The company designs and manufactures high-power indium phosphide (InP) lasers, photodetectors, and optical engines that act as the raw light source for optical transceivers. The company is one of the few global players capable of producing these lasers at scale, giving it a virtual monopoly. Even when its competitors sell complete transceiver modules, they frequently use Lumentum's lasers to power them.

Transceivers

Coherent (NYSE: COHR) and Applied Optoelectronics (NASDAQ: AAOI) both provide critical transceiver infrastructure connecting switches and servers. Coherent is a powerhouse in optical materials, transceivers, and lasers, and its advanced photonics engine technology positions it as an essential partner to cloud providers. Since it is vertically integrated from the raw substrate material to the receivers themselves, the company has been one of the biggest beneficiaries of the shift toward using optical components in data centers.

Applied Optoelectronics is also a vertically integrated manufacturer of transceivers and components for data centers. It manufactures its own laser chips in-house for its transceivers, and has been aggressively ramping up manufacturing capacity to keep up with rising demand. The company is a key supplier to Microsoft, although this does add some customer concentration risk.

Image source: Getty Images.

Optical traffic

The final optics layer consists of the connectors, fiber, and systems that actually route data across server racks and between facilities. Amphenol (NYSE: APH) provides optical interconnect solutions that connect optical transceivers to switches inside a server rack, dramatically reducing latency and power consumption within GPU clusters. One great thing about the company, though, is that it will benefit from the data center boom regardless of how fast hyperscalers shift from copper to optics, since it not only supplies optical connectors, but also high-speed passive copper backplanes such as those used with Nvidia's NVLink interconnects.

Corning (NYSE: GLW) is another big beneficiary of the shift toward optical connectivity. Its high-density fiber cables and connection systems are the physical backbone of AI data centers, making this old-school glass company a next-generation optical play. Best of all, AI data centers require significantly more passive fiber strands than traditional data centers.

Finally, Ciena (NYSE: CIEN) builds optical routing systems that can carry optical traffic long distances from one data center to another. The stock is a nice way to invest in the increase of multifacility AI clusters and high-bandwidth optical transport.

Geoffrey Seiler has positions in Broadcom. The Motley Fool has positions in and recommends Amphenol, Broadcom, Ciena, Coherent, Corning, Lumentum, Marvell Technology, and Nvidia. The Motley Fool has a disclosure policy.