Nvidia derivative plays: Raymond James raises estimates on 3 data center parts makers after Blackwell release

Published Wed, Mar 20 20242:03 PM EDT

After Nvidia's blockbuster announcement this week, investors could find opportunities in other parts of the data center industry. Nvidia showcased its Blackwell graphics processing units, which investors and analysts bet could further drive the company's profits as the artificial intelligence craze shows no signs of slowing down. These new chips could lead to greater demand for AI data centers — and the companies that make components for them. Specifically, Raymond James highlighted makers of optical transceivers, which transmit and receive large amounts of data. The firm noted the demand within the optical AI market bodes well for several under-the-radar optical materials and semiconductor manufacturers. "The larger hyperscale deployments featuring thousands of GPUs will still require optical connections to address the distance and speed requirements. ... Because optical transceivers play a role in AI clusters, we envision implications and consider the derivatives for Coherent , Lumentum , and Applied Optoelectronics ," analyst Simon Leopold wrote in a Tuesday note. COHR YTD mountain Coherent YTD Coherent, which makes optical materials for a variety of industries, is Raymond James' top pick. The firm has a price target of $60 on the stock, implying upside of 3% from Tuesday's close. Shares have soared about 36% this year, and analysts on surveyed by FactSet think the stock could jump another 12% over the next 12 months. "Coherent is our favorite play on the A.I. opportunity with the most market share (~22%), leading edge product portfolio, and material exposure as a percentage of overall revenue (~32% in December)," Leopold said. The company is also a top AI beneficiary according to Rosenblatt Securities. Coherent, which sells to Nvidia and Google, should become the top vendor by market share by the second quarter of 2024, Rosenblatt said in a Tuesday note, adding that Coherent has "the most complete portfolio of lasers and modules and is executing the best at this time." Rosenblatt's $76 price target on the stock implies roughly 31% potential upside. Applied Optoelectronics, which designs and manufactures fiber-optic networking products primarily for high-speed datacom transceivers and cable television amplifiers, has lost 28.9% year to date. However, it's up a whopping 475% over the past year. That's partly due to its supply agreement with Microsoft , which it entered into in June 2023. The company "has secured a great reference win with Microsoft, but we see risk from the balance of its data center and cable TV business," Leopold said. The Texas-based company popped more than 9% this week after it entered a $25 million equity distribution agreement with Raymond James. Rosenblatt had also maintained its buy rating and $20 price target on Applied Optoelectronics in its Tuesday note, saying the company "should be valued above the average of industry multiples." The stock closed at $13.60 on Tuesday, suggesting shares could jump another 47%. Raymond James also said it likes Lumentum , which sells optical and photonic products, especially after the company's re-entry into the data center market with its $750 million acquisition of optical modules maker Cloud Light in November. The stock is down 11.3% this year and just over 9% over the past 12 months. Analysts polled by FactSet think the company can make a recovery, however, forecasting 19.5% potential upside.