"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 have experienced an average decline of 40% from this year's peak, are now aiming for a rebound. Hana Securities stated that a buying opportunity has returned for this sector and maintained its "Overweight" investment rating.

Kim Jeongchan, a researcher at Hana Securities, commented, "While the positive trajectory of earnings improvement has remained intact, the recent correction has significantly eased valuation pressures. We recommend buying companies along the optical value chain whose valuations have become even more attractive."

The share prices of the global optical value chain have risen at least twofold since the beginning of the year, but after May, they dropped by an average of 40% from their peaks and are now attempting to recover. Considering that overall indices only saw a decline of around 5% during the same period, it is apparent that the sector as a whole was weak.

Korea Investment & Securities attributed the decline to supply bottlenecks during the first-quarter earnings season, which led to topline (revenue) growth and guidance (earnings forecasts) for major optical value chain companies falling short of expectations. This, combined with the perception that share prices were overinflated and a correction across the entire AI hardware segment, led to a downturn. Additional concerns about delays in the adoption of scale-up (vertical scaling) Co-Packaged Optics (CPO) due to production issues with Nvidia's next-generation AI server 'Caiber' also eroded the stock price premium.

However, in the second half of the year, there is a high likelihood that guidance will be raised as the indium phosphide (InP) supply bottleneck eases. AXT, a key supplier of InP substrates, previously announced plans to expand capacity by threefold this year and double it next year, citing that demand outpaces the pace of expansion. Nokia has experienced continued improvement in its optical division, and has mentioned that the ramp-up of its San Jose fab and additional acquisition of the Arizona fab in the second half will accelerate growth by securing more InP volume. Lumentum and Coherent have also indicated that their revenues will increase in the second half as InP bottlenecks ease. The full-scale mass production of Nvidia's next-generation AI chip "Rubin" is also positive for optical component stocks.

Photo by Google Gemini generated

Kim added, "Compared to the first half, the second half will see accelerated growth across the optical value chain driven by increased shipments and the transition to 1.6 terabits. This will be accompanied by upward adjustments in estimates and multiple expansion."

Korea Investment & Securities analyzed that although concerns over delayed scale-up CPO adoption had a significant impact on the share price decline, the overall discount applied to the optical value chain is excessive. They reasoned that the market share of pluggable transceivers remains stable, and optical companies have high visibility for medium- to long-term growth, even excluding CPO from projections.

The report further noted that demand for scale-out (horizontal scaling) and scale-across (cross scaling) optical solutions is increasing and that the recent delays related to the Caiber rack highlight the limitations of copper-based scale-up, which could paradoxically accelerate the transition to optical solutions. Nvidia’s initiation of mass production for scale-out CPO and its commitment to the existing roadmap were also cited as supporting factors.

Among noteworthy stocks, RF Materials was highlighted. Kim commented, "With Lumentum expanding shipments of pump lasers, package sales are growing, leading to outward company growth." He added, "Along with improved earnings and multiple expansion in line with global optical peers, the stock price is expected to rise."

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