COHR, LITE and AAOI: Can Photonics Solve AI’s Bandwidth Problem?

Artificial intelligence (AI) infrastructure is grappling with a problem that cannot be solved simply by throwing more GPUs at it.

As hyperscalers build larger and larger clusters, enormous volumes of data must move between processors, memory and switches, creating a bandwidth bottleneck that is pushing optical connectivity further into the centre of the AI stack.

Optical links can move data faster and over greater distances than conventional electrical connections, while consuming less power at high bandwidths. That makes photonics increasingly important as AI clusters scale and networking speeds move from 800G towards 1.6T and beyond: TrendForce estimates that the market for AI-focused optical transceivers will grow from $16.5bn in 2025 to $26bn in 2026, a jump of more than 57%.

The investment case has consequently moved beyond the traditional telecoms market. Companies that make optical components, lasers, transceivers and optical circuit switching are becoming AI infrastructure plays, with hyperscalers looking to increase bandwidth while controlling energy consumption and latency.

Coherent [COHR], Lumentum [LITE] and Applied Optoelectronics [AAOI] offer investors three ways into the space. All three stand to benefit from rising optical demand, but the companies are at different stages of the AI infrastructure cycle, and their risk/reward profiles are far from identical, as this analysis will unpack.

Coherent: The all-rounder play

Coherent has evolved into one of the largest and most diversified photonics suppliers, giving investors exposure to the AI networking boom without making the company entirely dependent on a single optical product. The business combines lasers, optical components, fibre, transceivers and other photonic technologies, giving it a broader position in the infrastructure stack than smaller rivals.

That evolution is now becoming manifest in its financial performance. Coherent reported fiscal 2026 revenue of $7.12bn, up 22.5%, while Q4 revenue rose 33.8% year-on-year to $2.05bn. Non-GAAP EPS increased to $1.74 from $1, and full-year operating income more than tripled to $898m. Management expects fiscal Q1 2027 revenue of $2.2bn to $2.4bn, with non-GAAP EPS of $1.85 to $2.05.

Recent product developments reinforce the AI thesis. In September, Coherent launched PhotonLink, an integrated optics platform spanning lasers, silicon photonics, precision optics, fibre and detectors for co-packaged optics, near-packaged optics and emerging chip-to-chip architectures, among other fiendishly complex gizmos. The company says it has more than ten customer engagements each for both CPO and NPO, with revenue from PhotonLink expected to begin ramping in the Q4 of calendar 2026.

For investors, Coherent’s attraction is breadth. Its scale, improving margins and broad technology portfolio provide some insulation if a particular optical architecture fails to become dominant. The trade-off is that investors are already paying for a substantial portion of the AI opportunity.

Lumentum: The momentum play

Arguably, Lumentum offers the most direct exposure of the three to the accelerating demand for optical connectivity in AI data centres. Its products include lasers, optical components, transceivers and optical switching technologies, while its portfolio is increasingly focused on the transition from electrical to optical connections as bandwidth requirements rise.

The financial trajectory has been striking. Fiscal Q4 revenue more than doubled y/y to $1.01bn, while adjusted EPS jumped 267% to $3.23. Adjusted gross margin reached 50.4%, compared with 37.8% a year earlier. Management expects fiscal Q1 2027 revenue of $1.225bn to $1.275bn and adjusted EPS of $4.05 to $4.35, implying another sharp step-up in profitability.

Lumentum is also moving up the optical stack. It has begun shipping 1.6T transceivers and is expanding its laser capacity, while optical circuit switching is emerging as another potentially significant growth opportunity. At the European Conference on Optical Communications 2026, a major industry event, Lumentum demonstrated technologies for co-packaged optics and direct optical connectivity between AI processors.

The company has also benefited from powerful external validation. The ubiquitous Nvidia [NVDA] invested $2bn in Lumentum in March, highlighting the strategic importance of optical connectivity to the next generation of AI infrastructure.

For investors, Lumentum combines strong near-term earnings momentum with considerable AI exposure. That makes it particularly attractive if the optical spending cycle remains strong. But it also makes expectations demanding: the shares have already dramatically outperformed, leaving less room for wobbles.

Applied Optoelectronics: The high-octane play

Applied Optoelectronics is the smaller and more speculative member of the group, but potentially offers the greatest operating leverage to an acceleration in AI optical demand. The company manufactures optical transceivers and related networking products, with its 800G and 1.6T products increasingly aimed at hyperscale data centres.

Its recent trajectory shows how quickly that opportunity is developing. Q2 revenue rose 86% y/y to $191.9m, while the company returned to non-GAAP profitability, reporting adjusted EPS of $0.06 compared with a loss of $0.16 a year earlier. Data centre demand was particularly healthy, with 800G revenue more than doubling sequentially and increasing more than tenfold y/y.

The constraint is now increasingly capacity rather than demand. The firm said demand for its 800G and 1.6T products should exceed production capacity through mid-2027. It expects monthly production capacity for those products to reach roughly 650,000 units by the end of 2026, up from nearly 200,000 in Q2.

Management expects Q3 revenue of $255m to $290m and adjusted EPS of $0.11 to $0.26. However, gross margins remain substantially below those of Lumentum, while the company is committing heavily to capacity expansion.

That creates a higher-risk, higher-upside proposition. If AAOI can execute its capacity expansion while maintaining pricing and margins, revenue growth could be substantial. However, the company has less financial and operational cushion than its larger peers.

Photonics snapshot: COHR vs LITE vs AAOI

This is how the three stocks currently compare in terms of fundamentals.

Source: Yahoo Finance

In essence, the three companies offer three different ways to express the same investment thesis.

Coherent is the broadest play. Its scale, vertical integration and diverse photonics portfolio make it less dependent on any single optical architecture, while its improving profitability gives investors evidence that AI-driven demand is translating into operating leverage.

Lumentum offers the clearest combination of AI exposure and current financial momentum. Nvidia’s investment adds another layer of strategic credibility. But Lumentum has also been one of the sector’s strongest performers, making expectations particularly high.

AAOI is the more asymmetric proposition. Its smaller revenue base means that successful execution could produce much faster percentage growth, while its expanding US manufacturing footprint could benefit from supply chain diversification away from Chinese optical suppliers. But margins are lower, capex is heavy and the business remains much more dependent on successfully scaling a relatively narrow set of products.

For a more defensive investor, Coherent arguably offers the best balance. Lumentum is the purer AI infrastructure growth play, while AAOI is the higher-risk option for investors willing to bet on continued explosive growth in optical transceivers.

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