If you invested $10,000 into Nvidia just

4 years ago, you'd have over $125,000

today. If you put that money into

Palantir, you'd have close to a quarter

million dollars right now. That's

because these companies had the perfect

products for the fastest-growing market

on the planet. But Nvidia and Palantir

are two of the most well-known companies

on Earth. My name is Alex, and I spent 8

years as an electrical engineer and AI

researcher at MIT. And in this video,

I'll show you two smaller stocks set to

grow even faster, making them a great

way to get rich without getting lucky.

Your time is valuable, so let's get

right into it. First things first, I'm

not here to hold you hostage. This video

is all about moving information inside

AI data centers at the speed of light.

And there are two stocks that I'll use

to explain the market. Coherent, ticker

symbol COHR, which found a way to make

four times more lasers out of every

wafer at half the cost. And Lumentum,

ticker symbol LITE, which makes lasers

to replace copper wires inside data

center racks. And of course, I'll share

which one of these stocks I think is the

best buy right now. I want to make the

best use of your time. So let's start

with what these companies have in

common, like their markets, their

customers, and their risks. When OpenAI

released ChatGPT almost 4 years ago, the

biggest bottleneck was compute. How fast

new AI models could be trained and how

fast they'd respond after being prompted

was limited by the number and the speed

of the GPUs powering them. But that's

not really true today. Each new

generation, like Nvidia's Hopper,

Blackwell, and Rubin GPUs, got so much

more powerful that they would actually

churn through the data faster than

anything could feed them. That means

these AI chips were sitting idle,

waiting for more data so that they could

do their job. And that means the

bottleneck moved from the chips

themselves to the network feeding them.

Most data center routers and switches

send electrical signals over copper

wire, which works well for short

distances but breaks down for large

distributed AI data centers. On the flip

side, optical networks transmit light

through glass fibers, and light can

carry much more data over much longer

distances with much lower losses along

the way. So, copper makes a lot of sense

for moving data between chips inside a

single rack, but serious AI data centers

use optical networks to move data

between racks, between buildings, and

even across continents using undersea

fiber. Optical connections can push

400G, 800G, or even 1.6T of bandwidth

per port. G stands for gigabits per

second. Your copper internet connection

at home is probably 500 megabit or 1

gigabit internet, which is already fast

enough to stream multiple 4K videos at

the same time. A 400G optical connection

is 400 times faster than that, and 1.6T

means 1.6 terabits per second, or 1600G.

That's the kind of insane bandwidth that

massive AI data centers need to feed

their GPUs fast enough so they don't sit

idle. And just like everything else

inside a data center, optical networking

is actually an entire stack.

Transceivers are the little plug-in

modules that sit in switches and server

ports. They're called transceivers

because they can transmit and receive

data. On one end of a fiber optic cable,

they read in electrical signals from a

chip and convert those signals into

light using a tiny laser. Then, on the

other end, they read in that light and

convert it back to electricity. I'm

making this video right now because

something big is happening with these

lasers. The big thing that investors

need to understand is that silicon is

great for compute, but terrible for

making light. So, unlike most of the

chips that we talk about on this

channel, laser chips are actually made

with indium phosphide, or InP, instead

of silicon. For the last 30 years, InP

lasers were mainly used in long-haul

telecommunications equipment, signal

transmitters, boosters, and switches

that carry data over very long

distances. So, companies like AT&T and

Verizon would buy hundreds or thousands

of InP lasers whenever they expanded

their networks. And since they were such

low-volume products, the supply chain

for them was low-volume, too, using 2-in

or maybe even 4-in wafers instead of the

big 12-in silicon wafers that the rest

of the chip industry uses. But, here's

the big problem. The AI industry needs

hundreds of millions of these lasers

today. A 1.6 terabit transceiver has

eight of these laser chips sending data

at 200 gigabits each. And don't forget,

each fiber optic cable has two

transceivers, one at each end. So,

that's 16 chips inside a single cable.

And most GPUs actually take three cables

to connect to the rest of the cluster.

One from the GPU's network card to the

leaf switch at the top of the rack, one

from that switch to the spine switch for

that group of racks, and a third one to

the core switch that coordinates network

traffic for the entire cluster. So,

that's three cables, six transceivers,

and 48 indium phosphide laser chips per

GPU. And that's only one part of the

network, the one connecting GPUs in

different racks over InfiniBand or

Ethernet. The connections between GPUs

inside the same rack are still on copper

today. And that network carries around

nine times the bandwidth. So, moving it

to fiber would mean many more times the

lasers and roughly 20 more kilowatts of

power per rack, all to power the latest

AI models. By the way, Claude Fable 5 is

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right, so it turns out that there's a

big shortage in indium phosphide because

demand for lasers suddenly exploded with

the AI revolution. Just last month

Lumentum CEO said that the shortage

could get even worse than the memory

shortage and we all know what happened

to memory stocks over the last 2 years.

On top of that, the global market for

optical transceivers is expected to grow

from $23 billion last year to $112

billion in 2031, which would be a

compound annual growth rate of 30%.

That's two times faster than the S&P 500

over the last 10 years. So, this is the

exact kind of high-growth market that I

want to be investing in. But Coherent

and Lumentum also share some serious

risks. First, neither of them make their

own raw materials. Most of the world's

indium phosphide supply comes from just

three companies, Sumitomo and JX in

Japan, and AXT, which actually

manufactures in Beijing. That's

important because indium phosphide is on

China's export controls list. Second, if

hyperscaler spending does slow down,

both of these stocks will get hit hard.

As I'm about to show you, data centers

account for more than 70% of Coherent's

revenues. Lumentum doesn't report their

data center numbers anymore, but their

revenues grew by 83% year-over-year,

which probably didn't come from telecom

companies. Also, Nvidia buys from both

of them and owns a piece of them, too.

So, if they cut their optical networking

budget, both of these companies will

feel it right away. That's a huge upside

if AI spending keeps growing, but it's

also a lot of exposure to one single

market segment. And the third big risk

is that indium phosphide shortages and

supply constraints mean that both

companies have to spend more in order to

scale aggressively, and they need to do

it while demand is hot. So, any

construction or production delays hurt

them twice as bad, once for losing

market share today, and again for

missing demand down the road. That means

today's winners could quickly become

tomorrow's losers, and you need to know

that going in. All right, let's start

with Coherent, ticker symbol COHR.

Coherent reported $2 billion in revenue

last quarter, which is up 34%

year-over-year

with gross margins of 38.5%,

which is almost three points higher than

last year. For the full fiscal year,

their adjusted earnings came in at $5.61

per share versus $3.53

the year before. That's 59% earnings

growth year-over-year. Three quarters of

their revenue came from one place.

Coherent's data center and communication

segment generated $5.3 billion dollars

of their $7.1 billion in revenues over

the last year, while their older

industrial laser business actually

shrank. That's another strong signal

that demand for indium phosphide lasers

is now coming mostly from AI. One

special thing about Coherent is that

they're vertically integrated. They make

their own laser chips, package them into

optical engines, and build the finished

800G and 1.6 terabit transceivers that

those chips go into. While Lumentum

builds and sells components, Coherent

does everything starting from the bare

wafer, and that wafer might be the

secret to their success. Like I said

earlier, chips made on indium phosphide

used to be very low-volume products, so

they were made on 2-in to 4-in wafers.

But, Coherent moved their production to

6-in wafers, which lets them make four

times more chips at roughly half the

cost. But, they actually get even more

than that for two key reasons. First,

there's less wasted space at the edge of

the wafer as the wafer gets bigger. More

of the wafer gets turned into chips. And

second, yields actually tend to go up

with total production volume because the

process gets refined way more often.

Coherent CEO pointed out that their

yields are actually higher on their 6-in

lines across every single product that

they make on them. As a result, Coherent

expects to double their indium phosphide

output by the end of this year, and then

double it again by the end of 2027.

Nobody else even comes close. Earlier

this year, Nvidia invested $2 billion

into Coherent, which means they own just

under 4% of the company. They also

signed a multi-year agreement that

includes a multi-billion dollar purchase

commitment, as well as access to five

more of Coherent's product lines of

co-packaged optics. And this wasn't some

random investment. Nvidia has been in

the optical networking game ever since

they bought Mellanox in 2020, which is

how they have the biggest data center

networking business in the world today.

But Coherent's big advantages in the

laser chip market come with some real

costs, too. Coherent spent $1.1 billion

on CapEx over the last year versus about

$80 million in cash from operations.

That means they spent roughly $14 on

chip production for every $1 they

actually made. Their management team

says that investments into data center

chip production have an average payback

period of about 18 months. So, if

they're right, this is pretty much the

best investment they could possibly

make. But if their schedule slips, it'll

be a very expensive mistake. As an

investor, I really like Coherent's full

stack approach to optics, from their

cost-efficient 6-in wafers all the way

to their high-speed transceivers. And

even though they're spending $14 for

every $1 they make, being backed and

partly owned by Nvidia lowers the risk

of all that spending over the next few

years. Talk about a great way to get

rich without getting lucky. And that

brings me to Lumentum, ticker symbol

LITE. And if you feel I've earned it,

consider hitting the like button and

subscribing to the channel. That really

helps me out, and it lets me know to

make more comparison videos like this.

Thanks. Now, let's talk about Lumentum

stock. Lumentum reported a billion

dollars in revenue last quarter, which

was up 109%

year over year. Adjusted earnings per

share came in at $3.23

versus just $0.88 a year ago, which

means their earnings are up 267%

from last year. And their adjusted gross

margins hit 50.4%.

You know the shortage is bad when gross

margins get this high on components.

Lumentum's main product is an

electro-absorption modulated laser, or

EML. EMLs do two jobs on the same chip.

First, it has a laser that runs

continuously at a specific wavelength.

And second, it has an absorber that sits

right next to it. When the absorber

turns on, the light from the laser is

blocked, which is the same thing as a

zero. When the absorber turns off, the

laser can get through. That's a one.

This absorber can turn on and off more

than a hundred billion times per second.

That's how Lumentum encodes data into

its lasers. Lumentum makes several

different kinds of lasers besides EMLs.

For example, they make ultra-high power

lasers for silicon photonics that get

switched on and off somewhere else

entirely. And they also make pump

lasers, which don't carry data at all.

They feed the amplifiers that keep

telecom signals strong as they travel

across long distances. Lumentum is

effectively sold out of their pump

lasers for the foreseeable future. But

the biggest opportunity is where all

these lasers are about to sit. Today,

optical engines live inside a plug at

the front of a switch that's connected

to a chip by tens of centimeters of

copper. The problem with copper is that

the faster you try to move a signal

through it, which means the higher the

frequency, the more signal you lose

along the way for two reasons. First,

current stops flowing through the middle

of the wire and crowds towards its

surface, so there's less metal actually

carrying the signal. That's called the

skin effect. And second, some of that

signal gets absorbed by the wire's

insulation and turns into heat. That's

called dielectric loss. And both of

these losses can get pretty noticeable

even over just a few inches of copper.

But glass doesn't have these problems.

It would take 20 miles of optical fiber

to lose as much signal as just 10 inches

of copper. And co-packaged optics

actually move the laser right next to

the chip. Switching to fiber optics and

shortening this electrical path lowers

the amount of energy that it takes to

move data by over 60%. Nvidia says their

co-packaged optical switches cut network

power by three and a half times and use

four times fewer lasers to do it. That

saves around 13 kilowatts of power on a

Grace Black rack or about 10% of the

rack's entire power budget, which means

all that extra power can go back to more

compute. That's exactly why Nvidia

invested $2 billion in Lumentum on the

same day they invested in Coherent and

with almost the same terms. Lumentum

spent $451 million on factories and

equipment last year against $751 million

in cash from operations. That means they

spent 60 cents for every dollar they

actually made compared to Coherent's 14

bucks. One thing I should mention is

that if you pull up Lumentum's numbers,

they posted a net loss of $84.65

per share last quarter, but that's due

to a one-time non-cash charge of $7.8

billion dollars associated with

converting debt to equity, but the

business itself generated $279 million

in operating income for the quarter.

This is why it's important to look into

the details instead of just trusting

headline numbers. So, if networking

really is the next big bottleneck for

AI, Lumentum is one of the only

companies in any position to solve it,

especially with Nvidia in their corner,

too. All right. So, which of these two

stocks am I actually buying? Personally,

I'm still buying both. Just like I said

last time I covered them. But don't

worry, I won't leave you hanging. If I

could only pick one, I'd still pick

Coherent because they built the world's

first production line for 6-in indium

phosphide wafers and they're on track to

quadruple their capacity by the end of

next year. That's exactly what you want

to be doing during a shortage. Just

remember, they're spending $14 for every

dollar they actually generate to do it.

That said, I think Lumentum still has a

ton of upside. They grew their revenues

by 109% year-over-year at over 50% gross

margins, and they only spent 60 cents on

every dollar to do it. So, at the very

least, both of these stocks are worth a

spot on every long-term investor's watch

list. Let me know in the comments

whether you're buying Coherent or

Lumentum stock, and if you want me to

make a deep dive video on either one of

them. And if you want to see even more

stocks I'm buying to get rich without

getting lucky, check out this video

next. Either way, thanks for watching,

and until next time, this is Ticker

Symbol You. My name is Alex, reminding

you that the best investment you can

make

is in you.