After a sharp retracement in stock prices, Bernstein is still optimistic about Lumentum (LITE.US) and Coherent (COHR.US) and reaffirm the “outperforming market” rating

The Zhitong Finance App learned that Bernstein said in the latest research report that despite widespread pressure on artificial intelligence (AI) related stocks recently, the stock prices of optical communication equipment manufacturers Lumentum (LITE.US) and Coherent (COHR.US) fell 13% and 28% respectively in the past month. The main factors that triggered the sell-off did not substantially change the fundamentals of the optical communications industry. The bank continues to be optimistic about the long-term growth prospects of the two companies in the AI infrastructure construction wave, reaffirming the “outperforming market” rating of the two companies' stocks, and maintaining target prices of $1,220 and $350, respectively.

Bernstein pointed out that the recent pullback in the AI sector has been affected by multiple factors, including weak revenue performance of some AI laboratories, CoreWeave (CRWV.US) financing issues, profit settlement after the Open Computing Project (OCP) summit, financial forecasts showing no room to clearly exceed expectations, and the deterioration of the macroeconomic environment. Among them, the slowdown in AI lab revenue, financing pressure, and the macro environment are more important stock price drivers, but these problems do not necessarily mean that demand for AI infrastructure is weakening at the same time.

The bank believes that the revenue pressure on some AI laboratories may be related to changes in the competitive landscape and the popularity of open weighting models, rather than a fundamental reversal in the computing power demand of the entire AI industry. As long as AI model performance continues to improve and application penetration rates continue to expand, tech giants will still be motivated to invest in next-generation model training and related infrastructure to support the long-term demand for high-speed optical modules, optical devices, and optical interconnection systems.

It is worth noting that Bernstein believes that the real long-term dispute in the optical communications industry is not whether AI demand will grow, but whether future demand expansion can be transformed into the revenue and profit currently anticipated by the market.

According to the bank's calculations, the NVLink vertical expansion (scale-up) bandwidth of the NVDA.US (NVDA.US) Vera Rubin NVL72 architecture reached 216 Tb/s, while the horizontal expansion (scale-out) network bandwidth was 32.4 Tb/s. The former is about 7 times that of the latter. Meanwhile, supply chain surveys show that the unit bandwidth prices for the 1.6T pluggable optical module and the 3.2T co-packaged optical (CPO) scheme are approximately $0.48 and $0.44 per Gbps, respectively.

If future rack architectures can maintain a similar bandwidth ratio and price per bandwidth, then the potential market opportunities corresponding to vertical expansion of CPO may reach about 6 times that of the current horizontally expandable pluggable optical module market. This means that even if the CPO's penetration rate in vertically expanding networks in 2028 is still limited, it may bring significant room for revenue growth for optical communication vendors.

However, Bernstein emphasized that the above estimates are highly dependent on the price per unit of bandwidth being relatively stable, and this assumption is controversial. Historically, the price per bandwidth of optical communication products usually declined as technology progressed, and the current strong pricing environment benefits from indium phosphide (InP) supply bottlenecks to a certain extent.

Bearers worry that as indium phosphide production capacity continues to expand, and continuous wave lasers that do not rely on indium phosphide, such as VCSEL and micro-LED, get more applications, the supply and demand relationship in the industry may change, thereby weakening the pricing capacity and profit margins of optical communication products.

Bernstein believes that this dispute over long-term demand, technology routes, and supply constraints is unlikely to be resolved in the upcoming quarterly earnings report, but recent industry news is generally positive, which is expected to prompt the management of the two companies to release a more optimistic business outlook.

Among them, Nvidia is advancing the application schedule of CPO technology to 2027, and plans to use related technology in the vertical expansion network between racks; the Microsoft Maia architecture uses optical switching technology to connect 128 racks to build a supercomputing cluster with 12,288 accelerators. In addition, Lumentum and Coherent both demonstrated PCIe interconnect solutions based on VCSEL optical technology, and Coherent also launched PhotonLink products, further showing that optical interconnect technology is expanding to more AI computing scenarios.

As far as the upcoming financial report is concerned, Bernstein predicts that Coherent's performance is expected to exceed the market's unanimous expectations. The bank predicts that the company's revenue for the first quarter of fiscal year 2027 was about US$2,372 billion, up about 50% year on year, close to the upper limit of the company's guidance range of US$2.2 billion to US$2.4 billion, higher than market expectations of US$2.39 billion; adjusted earnings per share are expected to be US$2.05, which is also higher than market expectations of US$1.99.

Bernstein expects Coherent's gross margin to reach 41% for the quarter, an increase of 80 basis points over the previous quarter. For the second quarter of fiscal year 2027, the bank predicts that revenue will increase further to US$2,613 million, with adjusted earnings per share reaching US$2.28, all higher than the market's agreed expectations. This means that management may give guidance on results for the next quarter that are higher than market expectations when releasing financial reports.

However, Coherent's profit margin performance is still the focus of investors' attention. Bernstein pointed out that although the company is expanding production capacity for 6-inch wafers, the relevant cost advantages are not fully reflected in improved profit margins.

The bank believes this is related to Coherent's business model. Compared to Lumentum, which sells more upstream devices to Chinese optical module manufacturers, Coherent sells more complete optical transceiver modules and needs to undertake assembly processes with relatively low profit margins, so rapid revenue growth may not lead to the same margin of profit expansion. If management can further explain the profit contribution of the 6-inch wafer production capacity expansion, it will help ease market concerns.

For Lumentum, Bernstein expects its revenue for the first quarter of fiscal year 2027 to be approximately US$1,254 million, an increase of about 135% year over year, and adjusted earnings per share of US$4.18, which is basically in line with the agreed market expectations. The bank expects the company's gross margin for the quarter to rise to 52% from 50.4% in the previous quarter, and the operating margin to reach 40%.

Bernstein believes that Lumentum's second-quarter results have more obvious potential to exceed expectations. Revenue is expected to reach US$1,497 billion, and adjusted earnings per share are US$5.15, which is higher than market expectations of US$1,477 million and US$5.04, respectively.

However, since Lumentum's management has previously proposed a target earnings capacity of $40 per share by 2028, the market's focus is likely to shift more to long-term growth drivers, particularly the commercialization prospects of the optical circuit switch (OCS) business.

Based on supply chain information, Bernstein estimates that Lumentum's OCS solution costs about $600 per port, corresponding to the device value of a single Google TPU v7 Ironwood rack of about 150,000 US dollars. Assuming the deployment volume of TPU v7 reached 2.6 million in 2026, and each rack was configured with 64 TPUs, this platform alone could create a potential market opportunity of about $6 billion for OCS.

However, the bank emphasized that this does not mean that Lumentum will receive all of the relevant revenue. Since the cost of its OCS solution is significantly higher than the Celestica foundry solution previously adopted by Google, Bernstein is still uncertain about the specific reason why Google switched to Lumentum, and it is difficult to accurately determine how much market share the company will eventually gain.

In terms of valuation, Bernstein pointed out that recent stock price pullbacks have further increased Coherent's valuation appeal compared to Lumentum. Although the bank previously preferred Lumentum, as the valuation gap between the two companies widens, it is no longer clearly favoring either of them.

According to the report, as of October 19, Lumentum's stock price was $834.51, and Coherent's stock price was $232.02. Based on Bernstein's target prices of $1,220 and $350, the two companies have potential upside of about 46% and 51%, respectively.

Bernstein believes that short-term financial reports may not completely dispel market concerns about indium phosphide supply, CPO technology routes, and long-term profitability, but if the two companies can hand over steady performance and send a positive signal about demand for the next quarter, it will help restore investors' confidence in the AI optical communication industry chain. As a result, the bank continues to maintain a positive judgment on the two companies, believing that the current stock price correction has not changed their long-term investment logic.