CEO Watchlist: Week In Review (3/1/26)

For decades, technology has been able to continuously grow, but recently, we've been testing the boundaries of what's physically possible. As data demands explode, electrons are hitting a physical wall: they generate immense heat and face severe speed limits. Enter "photonics". Simply put, photonics is the science of using light (photons) instead of electricity to transmit information. Imagine upgrading from a cramped, congested dirt road (copper wiring) to an infinite-lane, frictionless superhighway (fiber optics), but shrunken down to the microscopic scale of a computer chip. This technology is rapidly becoming the vital central nervous system for modern computing, allowing data to move at the speed of light with a fraction of the power consumption and heat generation.

Our bull case for the photonics sector rests on a simple, urgent truth: the artificial intelligence revolution is choking on its own plumbing. Generative AI models require massive clusters of GPUs working in perfect unison, which means the bottleneck is no longer just how fast a single chip can calculate, but how fast thousands of chips can talk to each other. Photonics is the only scientifically viable bridge over this data chasm. By replacing electronic interconnects with optical ones, data centers can drastically cut power consumption, a critical factor as energy grids strain under AI's weight, while exponentially increasing bandwidth. To keep it simple, photonics reduces cost and increases efficiency.

Skeptics often argue that traditional copper interconnects are still cheaper and continuing to improve, which is true for very short distances within a server rack. However, while copper might win the inch, light wins the mile; the unforgiving physics of scaling massive AI data centers dictate that copper will inevitably max out in power efficiency, leaving photonics as the mandatory next step in computing evolution. So copper might have a slight edge today, but over the next 10 years, it will become outdated and if you're these big tech companies, you're not building for the next couple years, you're building for the next century. 

To capitalize on this inevitable paradigm shift, we are focusing on the foundational layer of the optical supply chain, the companies building the picks and shovels of the light revolution. Here are the 5 stocks we like in this space:

• Applied Optoelectronics (AAOI) - This company manufactures the advanced optical products and laser components needed for broadband and data centers. AAOI is our favorite name in the photonics sector. They just reported earnings, and management threw out some mind-blowing numbers! This is a company that is valued at $5.7 billion, and in the near future they're projecting to do $378 million per month for their transceivers! For those that don't like math, that comes out to be just over $4.5 billion a year. Currently, their full-year revenue is around $456 million. This would imply almost a 10x growth rate if management can deliver! Since their market cap is currently $5.7 billion, if we assume they can even do half of what they're projecting, they could demand a valuation of $20 billion, which would be a 4x from here and could take their current stock price of $84/share all the way up to $320/share. Obviously this is assuming management can come through and execute on their promises. Based on their numbers we are seeing, and the hints at them working with multiple big tech names such as Amazon and Google, we think this under-the-radar photonics name could still have a lot of room left to run despite its huge outperformance over the past few months.
• AXT (AXTI) - AXT produces high-performance compound semiconductor substrates, essentially the exotic foundation materials (like Indium Phosphide) upon which optical chips are built. We like them as a vital upstream supplier; without their specialized materials, manufacturing advanced photonic lasers and detectors is simply impossible. The one thing we don't like about this name is their critical dependence on China, which has been hurting them recently in regards to their export permit delays. Because of these delays, they actually missed their revenue targets, and for that reason, we consider this one a little bit more risky. 
• Coherent (COHR) - Coherent is an absolute powerhouse in lasers and optical materials. We like them for their sheer scale and comprehensive portfolio in data center transceivers, making them an indispensable partner for almost every major tech giant trying to untangle networking bottlenecks. This is what we consider our safest bet on photonics. It's still risky, but less risk than others because it's a much larger and diversified company. 
• Lumentum (LITE) - Lumentum designs and manufactures highly specialized optical and photonic products. We like their aggressive pivot toward AI-driven cloud networking and their dominant market share in the specific types of lasers that power ultra-fast data transmission. Lumentum falls somewhere in the middle for us, where they're not the riskiest in our opinion, but they're also not the safest. Although they've moved away from China, they are still heavily concentrated in Asia. 
• Tower Semiconductor (TSEM) - Tower is a specialty foundry that manufactures analog integrated circuits. We like them because they offer dedicated silicon photonics manufacturing processes, serving as the essential factory that turns complex optical chip designs into physical reality for companies that don't own their own fabrication plants. We like this name because they have a very niche moat with their specialty foundry. It's very hard for customers to switch once they're already having TSEM design their chips. In addition, we always love a good balance sheet, and this company is one of the most financially stable in the entire sector. 

However, it is imperative to acknowledge that the market has violently woken up to this thesis, making this an exceptionally high-risk trade in the near term. Over the past few months, the photonics sector has experienced a parabolic, staggering run-up in stock prices. These assets are no longer cheap; their valuations are stretched tightly across expectations of flawless execution and uninterrupted AI spending from massive tech companies. When stocks move exponentially higher in a short window, they become hyper-sensitive to macroeconomic shocks, supply chain hiccups, or even slight misses in earnings reports. Investors must recognize that while the long-term technological trend is highly convicted, entering the trade after such a massive rally leaves short-term price action highly vulnerable to deep, painful corrections. Ultimately, the future of computing runs on light, and while the road there will be volatile, those who strategically navigate the photonics supercycle stand to capture immense value. We are looking to add on dips.