Lumentum and Applied Materials surge 121% and 67% as AI infrastructure plays

Lumentum Holdings and Applied Materials have left Nvidia in the dust this year, with shares surging 121% and 67% respectively as investors pile into the companies building the physical layer of AI infrastructure. Nvidia, by contrast, has gained just 12% in 2026, trailing the PHLX Semiconductor Sector index's 74% jump.

"Optical connectivity has become the bottleneck in AI data centers, and Lumentum's components directly solve that problem," said Rachel Kim, semiconductor supply chain analyst at Edgen. "The company's revenue trajectory reflects hyperscalers scrambling to eliminate latency between accelerator clusters."

Lumentum's revenue in the first nine months of fiscal 2026 reached just over $2 billion, up 72% from a year earlier. The company guided for $985 million in the current quarter, more than double the $480.7 million it reported in the year-ago period. Earnings per share jumped 4.5 times to $5.27, driven by higher-margin data center products. Applied Materials posted $7.91 billion in fiscal second-quarter revenue, up 11% year over year, with EPS rising 20% to $2.86. The company expects third-quarter revenue of $8.95 billion, a 23% increase, and EPS of $3.36, up 36%.

The divergence between Nvidia and its suppliers reflects a rotation within the AI trade. Nvidia's dominance in AI accelerators is well established — its data center revenue topped $130 billion in its latest fiscal year — but investors are now pricing in growth further down the supply chain. Lumentum's optical and photonic components, including lasers and transceivers, enable the high-speed connectivity that prevents AI chips from sitting idle waiting for data. Applied Materials sells the wafer fabrication equipment needed to manufacture those chips, with management forecasting a 30% increase in its semiconductor equipment business this year.

Optical components become a chokepoint

The optical component market is projected to grow at a 21% annual rate through 2029, reaching $30 billion in revenue, according to Cignal AI. Lumentum's products address a specific pain point: as hyperscalers deploy clusters of thousands of AI accelerators, the data moving between chips creates a latency bottleneck that optical interconnects can solve. The company's data center products carry higher margins than its legacy telecom business, which explains why earnings are growing faster than revenue.

Applied Materials benefits from a parallel trend. The company's partnerships with TSMC, Micron Technology, SK Hynix, and Samsung to develop AI-focused equipment position it to capture spending on leading-edge foundry equipment, DRAM, and advanced packaging. Management said those three segments will account for 80% of the wafer fabrication equipment market's growth in 2026, with a similar pattern expected in 2027.

Valuation and upside potential

Lumentum trades at 56 times forward earnings, a premium that its earnings acceleration may justify. If the company achieves $28.12 in earnings per share in two years and trades at 50 times earnings, its stock could reach $1,406, implying 64% upside from current levels. Applied Materials, at roughly 43 times forward earnings, could reach $837 if earnings hit $19.48 in two years, representing 86% upside.

Both stocks carry execution risk. Lumentum's valuation leaves little room for a slowdown in hyperscaler capital spending, while Applied Materials depends on TSMC and Samsung maintaining their aggressive fab expansion timelines. But for investors looking beyond Nvidia for AI exposure, the two companies offer direct plays on the infrastructure buildout that shows no sign of slowing.

This article is for informational purposes only and does not constitute investment advice.