It's been one of Wall Street's most heated AI debates - and it may be totally missing the point

By Britney Nguyen

Are copper cables or optical components best positioned to support the AI-networking boom? An analyst sees room for both technologies to win big.

One analyst sees opportunities for makers of copper-based and optical components in data centers.

The next phase of artificial intelligence depends on advanced networking. But Wall Street has been divided over whether traditional copper is best suited to support this technological trend, or if optical components will lead the new wave.

Now, Mizuho analyst Vijay Rakesh says investors can place their bets anywhere. He thinks both copper and optical have strong tailwinds going into 2029. That dovetails with the view Nvidia (NVDA) CEO Jensen Huang expressed during his GTC keynote last month.

Active electrical cables, or AECs - copper-based cables embedded with chips that are used for high-speed data transmission between servers in AI data centers - will maintain their dominant market share in short-reach AI interconnect situations for at least several years, Rakesh said in a note to clients this week. That's because they offer "lower cost and better reliability" compared to optical solutions.

See more: These 6 stocks could be major winners of an upcoming optics 'supercycle'

Credo Technology (CRDO), a major player, is ramping its AECs at the major cloud-services providers, Rakesh said, and the transition from Nvidia's Blackwell systems to its Rubin platform should also give the company a boost. He sees the potential for between $5 billion and $6 billion in AEC revenue in 2028, which would be about five to six times the revenue generated in 2025, Rakesh noted.

Plus, the transition to next-generation 1.6T copper cables could drive about 50% higher average sales prices, he added.

Credo's stock has fallen out of favor this year, losing 17% as investors have fretted about the optical threat.

That said, the copper market won't be the only beneficiary of the new AI wave. Rakesh sees an "inflection ahead" for co-packaged optics, or CPO - a technology that integrates optical transceivers directly into the same package as a chip, such as a graphics processing unit. By moving the signal closer to the processor, the CPO approach improves power efficiency, increases bandwidth and lowers latency - all crucial to running powerful AI workloads.

This is positive for Lumentum Holdings (LITE), he said, which produces components for CPO, including ultrahigh-powered lasers. Rakesh expects optical transceivers to have a dominant share for long-reach AI interconnects.

The total addressable market for AI-data-center cables is expected to reach about $22 billion in 2029, Rakesh noted, while the market for AI networking, which includes cables and switches, could grow to $98 billion.

Meanwhile, J.P. Morgan analyst Samik Chatterjee raised his price target for optical supplier Coherent's stock (COHR) on Thursday, citing "a positive inflection in the company's near- and medium-term trajectory" on the heels of AI-driven tailwinds.

Coherent's stock rose 8.2% on Friday to $307.50 per share - already above Chatterjee's new $300 price target.

The shift to AI data centers is driving an expansion of the total addressable market for optical components "well beyond Coherent's incumbency in the traditional pluggable transceiver market," he wrote.

In Chatterjee's view, Coherent "is uniquely positioned to capture its fair share of this expansion" in both CPO and optical circuit switching.

Coherent's stock is up 67% so far this year, while Lumentum's has surged 143%.

Don't miss: How Nvidia turned a steal of a deal into its secret weapon

-Britney Nguyen

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

04-11-26 0730ET