Goldman Sachs Asset Management's co-head of public technology investing, Sung Cho, asserts that the artificial intelligence market is undergoing a significant transformation, moving beyond its initial focus on graphics processing units (GPUs). The new frontier for growth, according to Cho, lies in the companies that facilitate the interconnection of AI systems, particularly those specializing in optical and fiber equipment. He has pinpointed Lumentum and Coherent as key players poised to benefit from this evolving landscape. This strategic pivot is driven by the increasing demand for AI inference, which necessitates a robust and scalable optical infrastructure to manage the vast amounts of data flow between rapidly expanding data centers.

Cho's analysis underscores a fundamental shift in the primary architectural bottleneck within AI development. Previously centered on computational speed, the constraint is now migrating to the efficiency and capacity of inter-chip and inter-server communication. As AI workloads evolve from primarily training-based to inference-driven, the physical infrastructure requirements are changing dramatically. Inference tasks demand more localized data centers situated closer to end-users, leading to an imperative for enhanced connectivity across numerous facilities. Within these data centers, traditional copper-based connections are proving insufficient and are being progressively replaced by advanced optical solutions to handle the accelerated data transfer rates.

The shift towards optical connectivity is further amplified by the inherent challenges in scaling optical capacity. Unlike semiconductor manufacturing, bringing new optical and fiber infrastructure online is a complex and time-consuming endeavor. This supply-side rigidity creates a prolonged window of opportunity for companies like Lumentum and Coherent, granting them a sustained advantage in the market. The demand for optical components and fiber optic solutions is escalating at an unprecedented pace, fueled by the insatiable growth of AI. This dynamic contrasts with previous semiconductor cycles, where bottlenecks often resolved more quickly as manufacturing capabilities expanded. The current environment suggests a more enduring competitive edge for firms dominating the optical connectivity space.

Lumentum's recent financial performance strongly supports this thesis. In its fiscal third quarter of 2026, the company reported an impressive revenue of $808.4 million, marking a substantial 90.1% year-over-year increase. Its non-GAAP operating margin expanded by 700 basis points sequentially to 32.2%, with non-GAAP earnings per share reaching $2.37. CEO Michael Hurlston highlighted significant backlogs for optical circuit switches, exceeding $400 million, and secured incremental multi-hundred-million-dollar orders for co-packaged optics deliverable in the first half of calendar year 2027. This robust growth and strong order book demonstrate the tangible impact of the surging demand for optical solutions in the AI era, with shares showing remarkable appreciation over the past year.

Similarly, Coherent is demonstrating its strong position in the AI infrastructure market. As a newly added S&P 500 component, the company reported third-quarter fiscal year 2026 revenue of $1.81 billion, an increase of 20.5% year-over-year. The Datacenter & Communications segment was a significant contributor, accounting for $1.36 billion of total revenue and experiencing a 40.6% growth. With a non-GAAP operating margin of 20.3% and non-GAAP EPS of $1.41, Coherent is actively expanding its capacity. CEO Jim Anderson indicated plans to double internal Indium Phosphide (InP) output by the end of 2026 and achieve another doubling by 2027. A strategic investment from NVIDIA, valued at $2 billion, further solidifies Coherent's role in the laser and optical networking sector, anticipating a substantial increase in its serviceable addressable market through innovative engine technologies like CPO/NPO and optical circuit switches.

As the AI industry continues its rapid expansion, the investment landscape is experiencing a strategic realignment. The focus is shifting from raw processing power to the sophisticated high-speed communication infrastructure that underpins advanced AI models and applications. Companies at the forefront of optical connectivity are emerging as critical enablers, benefiting from a sustained period of high demand and difficult-to-replicate manufacturing capabilities. Investors and industry watchers are closely monitoring the capacity expansions of key players and the flow of orders for advanced optical components, recognizing that these elements will largely dictate the future trajectory of AI infrastructure development.