AI has been a major market driver for the past two years, revolutionizing various sectors like cloud computing, networking services, and content creation. While this benefits the economy and boosts the stock market, it also presents significant opportunities for individual companies and investors. This article will delve into the impact of AI on the networking equipment sector and highlight two promising stocks identified by a top Wall Street analyst.
Table Content:
Citi’s Atif Malik, a highly ranked analyst, believes that networking equipment will continue to flourish due to AI’s influence. He outlines a transition from basic Ethernet networking to advanced stages where accelerated ASIC solutions drive the need for robust AI infrastructure within and between servers, as well as for data center interconnects (DCI). Malik has pinpointed two “top picks” in this space for 2025: Coherent Corporation (COHR) and Ciena (CIEN). Let’s examine these companies in detail.
Coherent Corporation (COHR): Riding the AI Optics Wave
Coherent Corporation, a leading provider of high-technology solutions, is well-positioned to capitalize on the AI boom. With a strong foundation in semiconductor optics and materials, Coherent has expanded into a wide range of optoelectronic components, laser subsystems, and advanced instrumentation. These products are crucial for various high-tech sensor systems used in visual scanners, touch screens, and LiDAR units, all of which are integral to modern automation and AI.
Coherent’s optical circuit switches are particularly vital for AI data centers. The rapid expansion of data centers fueled by AI has significantly increased demand for these critical components. This is reflected in Coherent’s impressive 145% year-to-date stock growth in 2024 and consistent revenue and earnings growth.
In its latest quarterly report (fiscal Q1 2025), Coherent reported $1.35 billion in revenue, a 28.6% year-over-year increase, exceeding forecasts by $30 million. Non-GAAP EPS of 74 cents per share also significantly surpassed expectations.
Malik believes that Coherent’s wide AI optics platform, encompassing lasers and transceivers, positions it as a key beneficiary of the growing AI infrastructure market. He estimates Coherent’s AI sales to reach $1.7 billion in FY2025, a remarkable 180% increase compared to FY2024. He also highlights the company’s strong management team and their focus on growth, pricing optimization, and operational efficiency. Malik assigns a Buy rating to COHR with a $136 price target, suggesting a 27.5% upside potential.
The overall consensus rating for COHR is a Strong Buy, based on 13 analyst reviews. The average price target is $116.23, indicating a 9% upside.
Ciena (CIEN): Capitalizing on AI-Driven DCI
Ciena is a leading provider of optical and routing systems, automation software, and related services. The company offers a comprehensive suite of solutions, including software-defined optical networking platforms, programmable routing and switching platforms, and intelligent automation software leveraging AI for network management. Ciena’s services encompass network building, operational support, and solutions for efficient service delivery.
Ciena’s expertise in network systems aligns perfectly with the increasing demand for intelligent automation and AI. Its solutions enable customers to optimize operations, support monetization strategies, and scale network architectures to handle the exponential growth in AI-powered traffic. Ciena is particularly well-positioned to benefit from the growth in DCI (optical data center interconnect) services, offering significant advantages in efficiency and scalability.
In its fiscal Q4 2024 report, Ciena exceeded revenue expectations with $1.12 billion, although earnings per share fell slightly short of forecasts. Despite this, investors responded positively, driving the stock price higher.
Malik anticipates Ciena will leverage the rebounding market and the AI trend in 2025. He notes Ciena’s leadership in DCI and expects the optical transport market to return to growth in 2025. He also highlights the growing AI-related DCI opportunity with ZR/ZR+ optical products. Malik assigns a Buy rating to CIEN with a $98 price target, representing a 9% upside potential.
Conclusion: Networking Equipment Poised for AI-Driven Growth
Both Coherent Corporation and Ciena are strategically positioned to benefit from the ongoing AI revolution. Their innovative solutions and strong market positions make them compelling investment opportunities in the networking equipment sector. While COHR presents a more significant upside potential according to current analyst estimates, both companies are expected to experience continued growth driven by the increasing demand for advanced AI infrastructure. As AI continues to reshape various industries, investing in companies like COHR and CIEN could offer significant returns in the coming years.
