Missed the rally in optical stocks? Coherent and Lumentum just got more attractive, according to J.P. Morgan.

J.P. Morgan says fears around co-packaged optics adoption are 'overblown,' making Lumentum and Coherent more attractive after recent pullbacks. Shares of Lumentum are about 15% below earlier-month highs and Coherent about 17% below highs, suggesting a better entry point despite continued enthusiasm for the data-center buildout.

Analysis

The interesting setup here is not simply that optical names pulled back, but that the market is still pricing co-packaged optics as a near-term displacement risk rather than a gradual architecture transition. That creates an opportunity because the first wave of spending in AI networking is still dominated by conventional optics, and customers typically dual-source while validating new architectures. In that window, the suppliers with the broadest product footprints and strongest design-win momentum can see upside even if the long-term mix shifts.

Second-order, any moderation in the optical trade likely pressures the weaker adjacent names first: smaller, more levered component vendors and any pure-play beneficiaries of a faster CPO adoption timeline. If the consensus narrative is that CPO is a 2025-2026 headwind, the more likely reality is that it becomes a bargaining chip in supplier qualification cycles, which delays—not destroys—demand for existing solutions. That favors the incumbents with pricing power and execution leverage over niche optical peers.

The contrarian miss is timing. Investors are treating “eventual” technology transition as if it were an immediate gross-margin cliff, but hyperscalers usually optimize for reliability and capex efficiency before architectural purity. That means the next few quarters can still deliver upward estimate revisions from AI-driven port growth, while the stock pullback offers a better entry point than chasing momentum after the initial rerating.

Risk is that the setup works for months, not days: if one or two large hyperscalers accelerate CPO validation or commentary turns more specific, multiple compression could reassert quickly. But absent hard evidence of broad deployment, this looks more like sentiment cooling than a fundamentals break, which gives the names room to outperform on any guide-up or backlog commentary.

Key Decisions for Investors

• Go long COHR on the current pullback with a 1-3 month horizon; use a stop below the recent swing low and target a retrace toward the prior highs if AI networking orders remain firm.
• Go long LITE vs. a basket of smaller optical pure-plays over the next 1-2 quarters; the better balance sheet and broader customer exposure should outperform if CPO adoption stays gradual.
• Buy call spreads in COHR or LITE into the next earnings cycle; this captures upside from any guide-up while defining risk if hyperscaler commentary turns cautious.
• Avoid shorting the group outright unless there is explicit evidence of accelerated CPO deployment; the near-term risk/reward still favors being long quality optics over trying to fade the trend.
• If entering fresh positions, scale in after any broad tech-market weakness rather than after optical-specific strength; this improves entry price and reduces the chance of paying for crowded sentiment.