Capital has rotated toward optical communications shares as enthusiasm for AI-chip valuations cools and traders cut exposure to storage names that had rallied on memory-price increases and earnings upgrades. The move, often framed as “optics in, storage out,” has lifted companies supplying the high-speed links needed to connect AI servers, with Applied Optoelectronics, Coherent and Lumentum rising roughly 40% to 50% since August, according to the figures provided.
Lumentum’s latest results added momentum to that trade after the company exceeded market expectations for revenue and profit. The optical-components supplier reported quarterly revenue of $1.01 billion for its fiscal fourth quarter of 2026, while gross margin moved above 50% for the first time and operating margin reached 36.4%.
Management forecast operating margin of about 40% in the coming quarter, despite revenue guidance of $1.25 billion. That margin target stood out because Lumentum had previously indicated that a 40% operating margin would be associated with quarterly revenue closer to $2 billion. The updated outlook suggests the company expects product mix, pricing and operating leverage to improve faster than its earlier internal revenue assumptions implied.
Laser supply tightens as 1.6T demand grows
The rally in optical communications shares reflects a more specific AI infrastructure constraint than demand for chips alone: data centers need increasingly capable connections between processors, servers and facilities.
AI training and inference clusters create intense “east-west” traffic, meaning data moving between computing nodes rather than between a data center and an outside user. Models require constant exchanges of parameters, activations and gradients across large pools of GPUs and other accelerators. As those clusters expand, the network connecting the machines can become a limiting factor even when enough processors are available.
Copper remains useful for short connections, but its limitations become more pronounced at speeds of 100G and 200G per channel. Signal loss, power consumption, crosstalk and reach constraints can make copper harder to deploy across larger high-performance clusters. Optical interconnects use light transmitted over fiber, allowing greater bandwidth density and longer reach in settings where copper becomes inefficient.
That places suppliers of lasers, transceivers, photodetectors and optical modules closer to a growing physical constraint in AI infrastructure. The industry is also moving from 800G networking equipment toward 1.6T, or 1.6-terabit-per-second, products. That upgrade raises demand for more advanced components and manufacturing capacity rather than merely increasing the number of conventional links.
Lumentum said on its earnings call that demand exceeded its laser manufacturing capacity. Michael Hurlston, chief executive officer of Lumentum, said custom laser supply could not keep pace with incoming orders. Management also said its largest co-packaged optics, or CPO, customer had accelerated its plans rather than delayed them, widening the supply-demand gap for ultra-high-power lasers compared with the previous quarter.
CPO places optical components nearer to switching and computing silicon, reducing the distance electrical signals must travel. The technology remains at an earlier deployment stage than traditional pluggable optical transceivers, but the customer commentary points to demand reaching further into next-generation data-center designs.
Storage trade loses momentum
Storage shares had previously benefited from expectations that limited supply would lift prices and profits for memory manufacturers including Micron and SK Hynix. Those gains became a widely held market position as memory pricing strengthened and earnings forecasts moved higher.
The recent selling indicates that traders have become more cautious as price gains moderate and valuations absorb earlier upgrades. U.S. jobs data added to the pressure by raising macroeconomic concerns and encouraging reduced exposure to crowded technology positions.
The contrast with optics is tied to where each group sits in the AI buildout. Memory remains essential to AI hardware, but the storage trade had largely been driven by a pricing cycle. Optical communications companies are gaining attention as buyers confront networking requirements created by ever-larger computing clusters and the transition to faster interconnect standards.
That does not guarantee a smooth run for the sector. Shares of Applied Optoelectronics, Coherent and Lumentum have already advanced sharply since August, leaving them more sensitive to earnings guidance, capacity commentary and any evidence that cloud operators are slowing infrastructure orders.
Coherent earnings become the next test
Attention now turns to Coherent, which is scheduled to report results next. Traders will be looking for evidence that Lumentum’s demand and supply observations extend across the optical-components market, particularly in data-center networking and high-power laser products.
Coherent’s report could also offer a clearer view of whether the 800G-to-1.6T transition is translating into immediate shipment growth or remains concentrated among a smaller group of early customers. A strong report would support the case that network components are becoming a more urgent procurement category for AI data-center operators. A weaker outlook could expose how much of the recent share-price gains already reflect optimistic assumptions.
The optical rally does not, on its own, establish that AI infrastructure shortages will raise costs for cryptocurrency miners or other decentralized computing operators. Large hosting sites may allocate power and facility capacity among AI workloads, cloud services and mining, but the economics depend on individual power contracts, hardware returns and customer agreements.
Core Scientific illustrates the overlap between power infrastructure and AI demand. The company has signed an agreement to provide 500 megawatts of facility power by 2027, while its rejected $9 billion buyout offer from CoreWeave underscored the value assigned to data-center sites with secured power and operating capacity. Such contracts can reshape how operators use their facilities, especially where AI customers offer long-duration commitments.
For Bitcoin miners, whose operations depend heavily on electricity and hardware efficiency, competition for suitable data-center capacity could become a practical issue in markets where power access is limited. Yet optical-component shortages and Bitcoin’s network computing power are separate measures of infrastructure demand. Bitcoin’s hash rate, cited at about 818 exahashes per second in the supplied material, reflects mining activity rather than demand for the optical networking equipment used in AI clusters.
The immediate market test remains narrower: whether optical suppliers can convert AI networking demand into sustained revenue growth and margins without capacity constraints curbing shipments. Lumentum’s guidance has raised expectations, and Coherent’s results will show whether the rotation toward optics has support beyond one company’s earnings report.
Explore AI‑driven market rotations in depth with our guide to AI copy trading for data‑center and semiconductor investors.
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