2 Optical Stocks to Buy After Tuesday's Selloff

Tuesday, Aug. 18, was rough on the artificial intelligence (AI) trade. Investors sold the richly valued growth stocks that led the AI boom, on worries that prices had run too far and that data-center demand may not last. Rates were not the trigger: the 30-year Treasury yield actually ticked lower, though it sits near its highest level since 2007.

Two of the day's harder falls landed on companies that make the optical components AI data centers run on. Lumentum(NASDAQ:LITE) dropped 9.9% to $873.31, and Coherent(NYSE:COHR) fell 12.8% to $306.43.

Neither decline traces to anything either company said. Both reported results this month, and both updates speak directly to the worry driving the selling.

Lumentum doubled its revenue. Coherent posted a record quarter and guided to a bigger one. I think both stocks look attractive here -- for different reasons.

Image source: Getty Images.

1. Lumentum: the steeper ramp

Lumentum makes the lasers and optical components that move data inside AI data centers, and demand has been running ahead of what it can supply.

Revenue for the fiscal fourth quarter (the period ended June 27) came in at $1.01 billion, up 109% year over year from $480.7 million. Full fiscal-year revenue rose 83% to $3.01 billion. And management expects $1.225 billion to $1.275 billion of revenue this quarter, another jump of about 24% at the midpoint.

CEO Michael Hurlston said in the earnings release that the company is "positioned at the heart of a secular industry shift." The guidance backs him up.

Profitability is scaling even faster than sales. Non-GAAP (adjusted) gross margin reached 50.4% in the fourth quarter, up from 46% for the full year, and adjusted earnings per share came in at $3.23. Guidance calls for $4.05 to $4.35 this quarter alone.

Also worth noting: the company reported a $7.2 billion GAAP net loss for the quarter, driven by a one-time, non-cash $7.8 billion charge tied to converting convertible notes into stock. That's an accounting event, not a business problem, but it explains why the stock has no ordinary price-to-earnings ratio right now.

The problem, however, is the price. Even after the sell-off, Lumentum's $78 billion market value works out to about 26 times the revenue it just reported for fiscal 2026.

Against earnings, the picture is friendlier. Shares trade at about 40 times what the company is expected to earn over the fiscal year ahead -- a year management has already opened by guiding to about $1.25 billion of first-quarter revenue, a pace that annualizes to well above all of fiscal 2026's sales. Sure, a miss could hit the stock hard here. But the company is guiding higher while telling investors demand still exceeds what it can build.

2. Coherent: more business at a lower premium

Coherent is the broader company, supplying optical transceivers, lasers, and the materials behind them across data center, communications, and industrial markets.

Its growth is slower than Lumentum's but still impressive. Fiscal fourth-quarter revenue rose 34% year over year to a record $2.05 billion, up 13% sequentially, and full-year revenue climbed 23% to $7.12 billion. Notably, the data center and communications segment rose 59% year over year to $1.6 billion -- 79% of the quarter's sales.

The margin recovery is what makes Coherent interesting. Operating margin hit 12.4% in the quarter, up from 0.4% a year earlier, and earnings per share swung to a positive $1.19 on a GAAP basis from a year-ago loss. For the current quarter, management guided to $2.2 billion to $2.4 billion of revenue, with adjusted earnings per share of $1.85 to $2.05, up from the $1.74 just posted.

"Fiscal 2026 was an outstanding year for Coherent, with record revenue, significant margin expansion, and non-GAAP EPS growth that was more than twice the rate of revenue growth," CEO Jim Anderson said in the release.

The soft spot is Coherent's industrial segment, which shrank 16% year over year to $430.5 million. The non-AI side of the business is working against the AI side, and that drag is part of why Coherent costs less. Shares trade at about 33 times expected earnings for the fiscal year ahead and about 8 times fiscal 2026 revenue, against roughly 40 times and 26 times for Lumentum.

Speed against breadth

Both sell components the AI build-out is short of. Both just guided to more growth this quarter. And both got marked down hard Tuesday on a worry their own results argue against.

Lumentum is the concentrated, faster ramp at a price that assumes the ramp continues. Coherent gives up speed for breadth, a recovering margin base, and a considerably lower earnings multiple, with the shrinking industrial segment as the trade-off.

I think both look attractive at these marked-down prices. The market sold them on the risk that AI demand fades. Both spent this month reporting demand they cannot fully supply.

Daniel Sparks and his clients do not have positions in any of the stocks mentioned. The Motley Fool has positions in and recommends Coherent and Lumentum. The Motley Fool has a disclosure policy.