While uncertainty is mounting about how the Iran war could disrupt the artificial intelligence industry's rapid growth trajectory, so far, there has not been a notable sell-off of big AI names. As a result, the industry's losses haven't outpaced the broader S&P 500's 4% year-to-date (YTD) loss.
In fact, despite external turbulence, new opportunities may be presenting themselves in the AI space. Specifically, a major investment by NVIDIA (NASDAQ: NVDA) of $2 billion each into two much smaller companies focused on photonics—Lumentum Holdings (NASDAQ: LITE) and Coherent Inc. (NYSE: COHR)—could signal an emerging focus on this developing branch of AI-adjacent technology.
NVIDIA appears bullish about how photonics firms could be instrumental in the next stage of AI infrastructure development. As a result, investors have flocked to those two firms, sending their shares higher over the last month.
This shift in technological focus has been enough to help to catapult other photonics firms upward as well. Here is what investors need to know.
Coherent's Big NVIDIA News Could Be Transformative, but Investors Should Keep an Eye on Valuation
One of the key issues impacting companies' ability to scale AI infrastructure is bandwidth. Traditional inter-chip communication methods are a limiting factor, and photonics may be essential to expanding that capacity as AI clusters continue to grow.
NVIDIA has made a significant bet in Coherent, one of the leading photonics companies, with a market capitalization of $51 billion. The two firms have a 20-year relationship, recently deepened by NVIDIA's latest investment as part of a non-exclusive agreement that will still allow Coherent to pursue other business.
COHR shares are up more than 45% YTD, which has led the stock to exceed the consensus price target of $241.92 by 11%. Still, COHR remains favorable among analysts, with 14 of 19 analysts covering the stock assigning it a Buy rating.
Still, investors may find that the company's fundamentals could help excuse its lofty valuation of 270 times earnings: Coherent's revenue surged by 17% year-over-year (YOY) for the latest quarter to about $1.7 billion, while earnings per share of $1.29 beat analyst expectations by an impressive 26 cents.
Driving those gains are significant data center growth rates, a significant ramp-up in production capacity, and optimistic guidance, including revenue for the current quarter as high as $1.84 billion and non-GAAP gross margin between 38.5% and 40.5%. Of course, investors should also keep in mind that the $2 billion private placement is dilutive, which adds an additional risk despite NVIDIA's apparent stamp of approval.
Shares of Photonics-Adjacent Nova Ltd. Are Soaring
While Coherent and Lumentum have dominated headlines in recent weeks because of NVIDIA, Nova Ltd. (NASDAQ: NVMI) is a photonics-adjacent firm quietly building momentum, with shares up more than 45% YTD.
Nova's metrology tools and process control equipment are valuable to semiconductor makers because they help to produce photonic components and advanced chips more broadly. Those tools are essential to the manufacturing and quality control processes for these AI materials. So it's little surprise that the booming AI market has naturally been great for Nova's business.
The company reported record full-year 2025 revenue of $881 million, up 31% YOY, with a forecast for Q1 2026 revenue of between $222 million and $232 million.
While Nova has not been the beneficiary of a major investment from NVIDIA, it is nonetheless gaining important traction with major partners. Multiple unidentified semiconductor makers have adopted the company's Metrion platform for their production needs. These partnerships are likely to continue generating revenue wins for years to come, helping to keep Nova steady amid a field that is often subject to cyclical trends.
Of the 10 analysts covering NVMI stock, nine assign it a Buy rating despite the current share price being nearly 9% higher than the consensus price target. Like Coherent, Nova's recent rally has stretched its valuation, but not to the same extent: The company currently trades at about 60X earnings. Investors drawn to Nova may share in the conviction that the firm is likely to continue to benefit from long-term partnerships as a critical player in the semiconductor manufacturing space.
Of course, given the significant rallies these and other stocks in the photonics (and adjacent) space have mounted in recent months, cautious investors worried about buying near the top may hold off for now. Both Coherent and Nova are now in a position to demonstrate their value to major manufacturers like NVIDIA—or to face a sell-off if enthusiasm wanes. But for those bullish about the future of photonics in the AI sphere, these two companies may be a great place to start looking.
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The article "2 Lesser-Known Photonics Firms May Play an Outsized Role in AI" first appeared on MarketBeat.
