A shift is occurring in the AI landscape, where the focus is moving from graphical processing units (GPUs) to infrastructure components like optical and fiber equipment. Goldman Sachs (NYSE:GS) Asset Management’s Sung Cho highlights this change as pivotal in the next phase of AI development. As various sectors adopt AI technologies, the emphasis on robust and efficient data transfer becomes crucial. This transition suggests new leaders may emerge in the AI hardware space.
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In 2022, the focus was heavily placed on semiconductor companies as critical components in AI processing. This year’s narrative has shifted to include more of the infrastructure required for AI deployment, like Lumentum and Coherent, showing a diverse exploration for optimized AI functionality. The increased interest in optics demonstrates an extension of the technological value chain previously imagined for AI.
Is Connectivity the New Barrier?
Cho identifies connectivity, rather than processing speed, as a leading challenge in AI progression. The transition from AI training to AI inference significantly increases the need for closely networked data centers. As compute speeds plateau, establishing better connections between these centers has become crucial. Current copper connections are being replaced by optical solutions to enhance this communication, illustrating a necessary evolution to meet burgeoning demands.
How Are Optical Devices Gaining Traction?
Optical equipment is complex and slow to ramp up in capacity, but demand continues to grow. This complexity could offer trade longevity as the industry struggles to quickly scale up production. Cho emphasizes that,
“One of the unique aspects of optical is that it’s extremely hard to bring new capacity online.”
Companies investing in this infrastructure may sustain competitive advantages due to limited immediate market competition.
Lumentum’s strong sales performance exemplifies the growing demand for optical technologies in AI infrastructures. Their significant year-on-year revenue growth to $808.4 million in the fiscal third quarter highlights this trend. The company is betting on optical circuit switches and co-packaged optics to drive continued growth. CEO Michael Hurlston noted their substantial backlog and increasing order volume, underscoring the robust demand pipeline.
What Are Coherent’s Plans?
Coherent’s investments are positioned to address the increasing demand for data transmission solutions. With projections to more than double capacity in the coming years, Coherent illustrates proactive scaling strategies and partnerships, including notable engagements with NVIDIA. CEO Jim Anderson highlighted the company’s efforts to increase production output, stating that they’ve maintained revenue growth,
“on track to double internal InP output by year-end 2026.”
According to analysts, both Lumentum and Coherent hold promising prospects with targeted high stock valuations. Investor interest appears intensifying, reflecting a pivot towards more integrated AI system components. Monitoring capacity expansions and industry demand will be essential as the market continues evolving.
The evolution from chips to optics in AI presents a strategic opportunity for both industry players and investors. Foreseeing a future where optical and fiber infrastructure play vital roles can guide intelligent investment decisions. This shift anticipates not only technological improvements but operational enhancements across the AI ecosystem.
