Investing.com -- Raymond James upgraded Coherent (NYSE:COHR) Corp and Lumentum Holdings (NASDAQ:LITE) to Strong Buy from Outperform, citing robust growth in AI-related backend transceiver sales and a recovering telecom market.

The firm sees concerns over Co-Packaged Optics (CPO) as overblown, which had previously pressured both stocks.

“With Coherent and Lumentum stocks under pressure into the OFC trade show this year, we anticipate greater clarity on CPO and the market opportunity overall could provide a positive catalyst,” analyst said.

Raymond James projects AI backend transceiver sales to reach $22.2 billion by 2030, reflecting a 30% compound annual growth rate (CAGR) from 2024 levels.

Given Nvidia’s roadmap and increased 800G demand, analyst at Raymond James now model 15 million units in 2025, adding that both companies are well-positioned to benefit as core suppliers in Nvidia’s ecosystem.

Concerns about CPO disrupting pluggable transceivers are overstated, Raymond James noted. Coherent and Lumentum possess critical technologies across VSCEL, SiPh, and EML-based transceivers and CPO chiplets.

Both companies are among a small group capable of supplying CPO components in volume.

Pluggable transceivers will continue to coexist with CPO, and CPO’s adoption should ultimately be a secular win for optical companies, analyst believe.

The telecom market is rebounding due to strong demand for data center interconnects and 400ZR deployments, benefiting both companies.

Meanwhile, industrial and instrumentation segments, which have faced macro headwinds, are stabilizing.

Lumentum’s exposure to these segments is limited which is roughly 15% of revenue, while Coherent’s exposure that is about 35% offers potential for monetization through strategic initiatives.

Raymond James sees near-term upside from greater clarity on CPO developments at the upcoming OFC trade show and highlights Coherent and Lumentum as key beneficiaries of long-term AI-driven optical demand growth.

“Coherent is in prime position to capitalize on AI backend initiatives, legacy datacenter front-end upgrades, the commercialization of co-packaged optics, and a recovery in telecom demand with OEM inventory restocking, while Industrial/Instrumentation are largely bottoming,” analyst at Raymond James said.

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