"Shares Plunged 40% From Highs, But Now a Buy Opportunity?"... Securities Firms Reaffirm This Pick [Weekend Money]

Korea Investment & Securities: "Recommend Buying Optical Value Chain"
"RF Materials Is the Stock to Watch"

Optical communication stocks, which had experienced an average decline of 40% from their highs earlier this year, are now aiming for a rebound. Hana Securities stated that buying opportunities have returned to this sector and announced that it is maintaining its "Overweight" investment rating.

Kim Jeongchan, a researcher at Hana Securities, said, "The direction for improving earnings remains intact, and with the recent correction, valuation pressures have significantly eased." He added, "We recommend buying stocks within the optical value chain, where the valuation has become more attractive."

Although global optical value chain stocks have surged by at least twofold since the beginning of the year, they have declined an average of 40% from their peaks after May and are now attempting a recovery. Considering that index declines over the same period were only around 5%, it suggests that the overall sector has been weak.

Korea Investment & Securities pointed to supply bottlenecks during the first-quarter earnings season as the reason behind the decline, noting that the top-line (revenue) growth and forward guidance for major players in the optical value chain fell short of expectations. The sense that share prices were excessive, coupled with an overall correction in the artificial intelligence (AI) hardware segment, contributed to the downturn. Additional concerns arose about the delay in adoption of scaling up (vertical expansion) co-packaged optics (CPO) due to mass production issues for Nvidia’s next-generation AI server 'Kaiber,' causing share price premiums to evaporate.

However, in the second half of the year, the easing of indium phosphide (InP) supply bottlenecks is likely to result in higher guidance. Core InP substrate supplier AXT previously announced plans to expand capacity threefold this year and twofold next year, as demand is outpacing the speed of expansion. Nokia has continued to improve its earnings in the optics segment, and has mentioned further acceleration of growth from securing InP volumes through ramp-up at its San Jose fab (factory) and additional acquisition of a fab in Arizona. Lumentum and Coherent have also indicated that revenue will increase after the second half of the year as InP bottlenecks subside. The initiation of mass production for Nvidia's next-generation AI chip "Rubin" is also seen as positive for optical parts companies' earnings.

Photo by Google Gemini generated

Kim added, "Compared to the first half, we expect shipment increases and accelerated growth from the transition to 1.6 terabits across the optical value chain in the second half, leading to upward revisions of estimates and expansion in valuation multiples."

Korea Investment & Securities analyzed that although concerns about delays in scaling up CPO had a major impact on share price declines, the overall discount applied to the optical value chain is excessive. The market share for pluggable transceivers is being maintained and optics companies are showing high medium- to long-term growth visibility even excluding CPO.

Furthermore, demand for scaling out (horizontal expansion) and scale-across (cross-expansion) optical solutions is rising, and the recently highlighted Kaiber rack delay issue may paradoxically accelerate the transition to optical technology, as it has highlighted the limitations of copper-based scaling up rather than simply delaying the CPO timeline. The fact that Nvidia has commenced mass production of scaling out CPOs and is maintaining its original roadmap was also cited as a basis.

RF Materials was highlighted as a key stock to watch. Kim said, "External growth is underway due to increased package sales driven by Lumentum’s expansion in pump laser shipments," adding, "With improvements in earnings and the expansion of valuation multiples among global optical peers (comparative groups), share prices are set to rise."

This content was produced with the assistance of AI translation services.