Weekly Update: 3 Stocks Driving the Next AI Wave
Good evening, and welcome to this week’s edition of Stealth Trades!
Artificial intelligence remains the major theme of the stock market. But money is rotating out of the obvious plays (chipmakers like Nvidia) into new companies that will allow AI to scale.
Earlier this year we saw huge moves in nuclear stocks as Wall Street bet big on a clean energy solution to address the power shortage for data centers.
We also saw big momentum in quantum computing stocks – an offshoot of the AI play.
But today I am seeing a new theme develop in the AI space – optical core cables. These specialized data cables will allow data centers to move data at much higher speeds – well in excess of the limits of today’s copper versions.
I won’t get too technical, but here’s the basics of it…
Data centers (the ones that power all the artificial intelligence models) are essentially giant warehouses of computer servers. Those servers are mounted in 6-foot tall racks that look like this:
Data is transferred between the servers, compute notes and top-of-rack switch via advanced copper data cables.
But copper has a limit to how much data it can transfer at high speed.
Today, most AI server racks are operating at a speed of 112Gbps. They move 112 gigabytes of data every second. But they can only do so for a distance of 2 meters. Past that, the cables suffer signal loss.
The next generation AI infrastructure will operate at 224 Gbps. At that speed, cable can move data less than 1 meter before running into problems.
By 2028, servers are expected to push data at a lightning fast 1.6 terabytes per second – 14 times today’s rate which is already pushing the physical limits of modern data cables.
A lot of this is beyond my technical comprehension, but the consensus bet is on a transition to linear drive optics. And there are three companies leading this move.
I am not recommending these as an official buy, but I would encourage traders to keep them on your watchlist. I’m watching for clean setups in these names and would welcome any opportunity to get in.
MACOM Technology Solutions (MTSI)
MACOM’s high-performance analog chips could become the most critical components in the chain. They possess a rare, high-barrier analog pedigree that digital-first competitors lack. Their 30% revenue growth is primarily driven by data center demand, and they are uniquely positioned to profit as the industry shifts to custom optical engines.
Fabrinet (FN)
Fabrinet feels like a less risky play here since, instead of betting on new technology, it just executes the manufacturing for the winners. As the primary manufacturer for Nvidia’s complex optical interconnects and a key partner for Lumentum and Coherent, they are an inevitable beneficiary of volume growth.
Coherent Corp (COHR)
This company manufactures something called indium phosphide lasers and modulators, which would allow speeds up to 1.6Tbps.
You’ll notice that all three of these charts look similar – strong trends heading to the upper right. This correlation is further evidence that Wall Street is making a bet in this specialized sub-sector.
Best wishes for your trading,
