Optical stocks surge again as hedge funds revive AI momentum trade

Optical component stocks are experiencing a surge in popularity among investors as they regain confidence in the significant spending by major tech companies on artificial intelligence, according to a Bloomberg report. Several companies, including Applied Optoelectronics, Lumentum, Coherent, Fabrinet, and Corning, have seen their stock prices rise by over 25% since late July.

Applied Optoelectronics has seen the most dramatic increase, surging more than 80% in just 10 trading sessions, while Coherent climbed 61%. This rally has been fueled by expectations of continued heavy investments by Microsoft, Alphabet, Amazon, and Meta in data centers and AI infrastructure. Optical technology, which uses light to transmit data more rapidly and efficiently than traditional copper connections, is becoming increasingly important as hyperscalers expand data-center capacity to support AI workloads.

The renewed rally in optical stocks came after Lumentum reported better-than-expected quarterly results and provided an outlook that exceeded analyst expectations, causing its shares to jump 16%. Other companies in the sector, such as Coherent, Fabrinet, and Applied Optoelectronics, also saw gains of 9%, 11%, 16%, and 5% respectively.

The optical sector had already been one of the top AI winners in 2026, with Corning, Lumentum, and Coherent more than doubling in value between the start of the year and mid-May, while Applied Optoelectronics surged 446%. However, this initial rally slowed as investors grew concerned about the sustainability of the enormous capital expenditure plans behind the AI boom.

Semiconductor stocks were among the first to weaken before the caution spread across the broader technology sector in July. But sentiment has shifted again as major tech companies have reported strong cloud businesses and reaffirmed their commitment to AI infrastructure spending. A potential US restriction on Chinese data-center components has added another catalyst for the sector.

A recent report suggested the Federal Communications Commission is considering restricting imports of certain Chinese equipment, including optical transceivers. If implemented, this could direct more demand towards US-based suppliers. The combination of strong AI demand and limited supply has helped solidify the sector's bottleneck status.

However, this also makes the stocks vulnerable to sharp reversals if supply conditions improve or spending expectations weaken. Demand for optical technology is expected to accelerate further in 2027, pushing up revenue by over 80% for Applied Optoelectronics last year and analysts expecting growth of about 130% in 2026 and 174% in 2027.