A rising tide can lift many boats at once. The biggest winners aren't always the most obvious names.
That's the case today in the advanced optics industry. Artificial intelligence (AI) giant Nvidia (NVDA +1.13%) announced long-term research partnerships with two leaders in the field. Coherent (COHR +3.30%) shares rose more than 14% on its Nvidia deal while fellow heavyweight Lumentum (LITE +4.83%) notched an 11% gain on a similar agreement.
Image source: Getty Images.
Two deals, one template, zero exclusivity
Nvidia used a boilerplate template for both press releases (dusted with management commentary), and both deals are "non-exclusive." The announcements felt like part of a wide-reaching strategy.
But you know who jumped even higher, even as Nvidia didn't include them in this bundle of optical technology deals? That would be nLIGHT (LASR +4.26%) and Applied Optoelectronics (AAOI +8.92%), whose stocks rose 20% and 21%, respectively.
Why the underdogs are winning today
The news-less stocks leaping actually makes some sense. If Nvidia is looking for multiple component suppliers and/or research partners in the optical tech sector, nLIGHT and Applied Optoelectronics could very well benefit from that strategy over time.
And the gains feed into strong market momentum in both cases. nLIGHT's stock is up 630% over the last year, and Applied Optoelectronics shows a staggering 3,720% return in three years. These stocks are keeping pace with market darlings like Nvidia.
NASDAQ: AAOI
Key Data Points
But these are small companies with a checkered past. A year ago, nLIGHT's price had fallen 19% over the previous two years. And before Applied Optoelectronics' tremendous three-year run, it had plunged 70% from March 2021 to March 2023. The larger optics experts with freshly signed Nvidia partnerships are more stable over time and far more profitable.
Essentially, shareholders of the smaller names are betting that their chosen company just became a more attractive acquisition target or future partner. Each stock's small size amplifies the move.
Does that idea hold water in the long run? Only time will tell, but let me tell you why I'm a skeptic. It won't surprise me at all if Nvidia shrugs off Applied Optoelectronics and nLIGHT to build stronger ties to true sector leaders like Coherent and Lumentum.
