3 AI Stocks to Scoop Up Instead of Nvidia

While shares of Nvidia (NVDA) might have fallen flat after the chip giant's latest quarterly earnings report, analysts at JPMorgan have highlighted a list of artificial intelligence (AI) stocks poised to benefit from signs of continued surging demand for AI products and services. The brokerage firm emphasized that Nvidia’s component suppliers will likely see a positive impact from these results, as nearly half of Nvidia's revenue now comes from data centers.

"Nvidia highlighted the importance and growing demand of liquid cooling, particularly relative to Grace Blackwell deployments, while also noting the importance of the supply chain of OEMs and ODM to take the Nvidia architecture and deploy it in a bespoke way for Cloud and Enterprise customers alike as it played down its appetite to integrate solutions for customers," wrote analyst Samik Chatterjee in a note to clients.

According to the analyst, that should bode well for component makers like Coherent (COHR), Fabrinet (FN), and Lumentum (LITE), some of which are direct partners with Nvidia. Here's a closer look at these 3 AI growth stocks.

#1. Coherent Corp

Based in Pennsylvania, Coherent Corp (COHR) is an emerging name in the optical industry, specializing in optical instruments and lenses. The company develops laser systems, optoelectronic components, and chips for a wide range of industries, including instrumentation and electronics, worldwide. Coherent has also acquired numerous optical and laser companies, further solidifying its position in the market.

Coherent is also recognized as a key player in the silicon carbide (SiC) market, a critical material in the production of high-performance semiconductors. Silicon carbide is highly valued for its ability to operate at higher temperatures and voltages, making it essential for applications in electric vehicles (EVs), power electronics, and industrial systems. Coherent’s expertise in SiC technology positions it well to capitalize on the growing demand in these industries, given the material's superior efficiency and performance advantages over traditional silicon-based semiconductors.

In its Q4 earnings report, approximately 6% of revenue came from silicon carbide materials. Additionally, two major automakers, Denso and Mitsubishi Electric, invested a combined $1 billion into Coherent's silicon carbide unit, boosting its valuation to approximately $4 billion. This underscores the growing demand for silicon carbide materials in the automotive industry.

COHR stock has surged more than 70% YTD to outpace the broader S&P 500 Index ($SPX), which has notched a 15.4% gain in the same time frame. Coherent trades at 25.75 times forward adjusted earnings and 2.09 times sales, roughly in line with the tech sector median.

Coherent exceeded expectations in its Q4 earnings, with revenue reaching $1.3 billion, marking 8.3% growth year-over-year, while adjusted EPS of $0.61 represented a 12.5% increase from the prior year.

Although the company's net loss increased this quarter to $48.4 million due to escalating trade tensions and rising operational costs, COHR was able to generate a robust free cash flow of $198.9 million, an impressive 45% increase from the prior quarter. This surge in free cash flow highlights Coherent's strategic use of AI to reduce capital expenditures and operational costs. By leveraging AI, Coherent has optimized production processes, streamlined supply chains, and enhanced the performance of its advanced materials and photonic solutions, driving efficiency and financial growth.

Moreover, the company also managed to maintain a gross profit margin of 30%, demonstrating strong expense control relative to sales. Coherent is strategically divesting non-core and underperforming assets to reduce debt and bolster its balance sheet.

For the first quarter of fiscal 2025, the company projects revenue between $1.27 billion and $1.35 billion, with adjusted EPS expected to range from $0.53 to $0.69. Analysts anticipate Coherent's revenue will grow by 90% year-over-year, with EPS rising by 99% annually and return on equity reaching 9.8% within three years. 

Overall, Wall Street analysts have given a consensus rating of “moderate buy” to Coherent stock, with the mean price target of $80.73, implying 8.7% upside potential from the current price.

#2. Lumentum Holdings

Based in California, Lumentum Holdings (LITE) is a prominent player in the photonics industry, specializing in the manufacturing and global distribution of advanced optical and photonic products. The company primarily operates in two segments: Optical Communications, which focuses on components used in data centers and telecommunications networks; and Commercial Lasers, which provides laser solutions for industrial and consumer markets.

Valued at $3.7 billion by market cap, shares of Lumentum Holdings have rallied just 5% YTD, lagging behind the broader market. However, the shares have gained some momentum in the last month, rising more than 32% on the back of strong quarterly earnings.

That said, Lumentum Holdings now trades at 34 times forward earnings, which is above the sector median of 24.1, suggesting that it may be slightly overvalued compared to its peers.

On Aug. 18, Lumentum Holdings announced its Q4 earnings for fiscal year 2024. The company exceeded top-line expectations, with net sales coming in at $308 million, beating estimates by $6.9 million. Adjusted per-share earnings of $0.06 also surpassed consensus estimates.

CEO Alan Lowe expressed confidence, noting that the company had surpassed its midpoint guidance in Q4 and reported record bookings for Datacom chips used in data centers. He highlighted the positive trend in the broader traditional networking market, stating, "We are making significant progress executing our strategy to broaden our cloud and AI customer base, which will lead to accelerated growth in the fiscal year 2025."

For fiscal 2025, the company guided for revenue between $315 million and $335 million, and expects to return to positive EPS in the range of $0.07 to $0.17. This guidance indicates that the company is taking serious steps in the AI realm to enhance its photonic products and increase profitability. 

Recently, Lumentum announced its latest AI-enhanced products, including 200G per Lane InP Components and the Ultra-High Power 400 mW 1310 nm DFB Laser, which will significantly improve data transmission speeds and power efficiency in high-performance optical communication systems.

From analysts' perspective, Lumentum appears to be a compelling investment, with Wall Street assigning a consensus "Moderate Buy" rating. The average price target of $59.73 implies about 8.4% upside potential from current levels.

#3. Fabrinet

Headquartered in Santa Clara, Fabrinet (FN) is a pioneering player in the optical and electro-mechanical industry. The company manufactures technical and precision electronic subcomponents for original equipment manufacturers of complex products, including industrial lasers and sensors. Fabrinet also supplies its products to major companies like Cisco (CSCO), along with Nvidia.

Valued at $8.12 billion by market cap, shares of Fabrinet have rallied 45.5% in the past 52 weeks and 17.7% on a YTD basis, surpassing the broader market over both time frames. However, FN shares nosedived in the past week, dropping nearly 8% on heavy insider selling, including by CEO Seamus Grady.

While the insider selling could stoke concerns about the stock being overvalued at current levels, the valuation metrics suggest that FN stock is reasonably priced. Fabrinet is currently trading at 22.51 times forward adjusted earnings, right in line with the sector median.

The company recently reported fantastic Q2 earnings results, which topped consensus estimates. Revenue reached $753 million, marking an excellent 15% increase year-over-year, while adjusted EPS of $2.41 improved by 29% from last year.

While a significant portion of its revenue comes from Nvidia, the firm’s prospects are not solely dependent on a single client. Numerous data communication and AI companies rely on Fabrinet’s specialized optical and electro-mechanical components, diversifying its revenue streams and strengthening its market position across multiple industries.

That said, as a major supplier to Nvidia, Fabrinet is well-positioned in the AI space to gain momentum from Nvidia's success. For Q1 of fiscal year 2025, the company anticipates revenue of $760-$780 million, with EPS expected to grow by 21% in the current quarter.

Taking all this into consideration, analysts have assigned a consensus rating of “Moderate Buy” to Fabrinet stock. Of the 6 analysts who cover the stock, 2 have a “Strong Buy,” 1 has a “Moderate Buy,” and 3 have a “Hold” rating. The average price target of $265.17 suggests 18.7% upside potential from current levels.