Don't Ignore This $500 Million Fiber-Optics Alarm
Editor's note: Nvidia is one of the biggest players in the semiconductor business. And as Joel Litman from our corporate affiliate Altimetry explains, one of the company's recent deals is signaling the next big bottleneck in AI... but it's not what you'd think. In this issue, originally published in the June 4 edition of Altimetry Daily Authority, Joel uncovers what this deal could mean for Nvidia's stock – and for the direction of the AI trend.
Chipmaker Nvidia (NVDA) wields a lot of power right now, even beyond semiconductors...
It can convince investors to care about a business they ignored just the day before. That's exactly what happened with high-tech materials company Corning (GLW).
Nvidia agreed to buy $500 million worth of ownership rights tied to GLW shares... to expand AI infrastructure.
Corning, in turn, agreed to boost U.S. fiber-production capacity by more than 50%. It will also supply the optical cables that quickly move data among chips, servers, and networking gear.
That puts Corning in the middle of the AI build-out. It also puts investors in a tricky spot...
You see, even though Nvidia is backing this fiber-maker, Corning's stock may not be worth chasing.
The Next AI Bottleneck
Throughout most of the AI boom, investors have obsessed over chips...
They're the engines that train and run large AI models. And Nvidia controls the most valuable part of that market.
It's why every new data-center plan seems to circle back to Nvidia.
But a data center is more than just chips, which are still in high demand. Fiber-optic cable is just as hard to come by. Right now, the lead time for these new cables is more than a year.
Earlier this year, Nvidia invested a combined $4 billion in Lumentum (LITE) and Coherent (COHR), both of which make optics equipment.
Corning is a logical next target. With Nvidia's backing, Corning plans to build three new complexes in North Carolina and Texas... and create more than 3,000 U.S. jobs.
The growth targets are big, too... Corning expects to reach $20 billion in annual sales by the end of 2026. It's targeting $30 billion by the end of 2028.
Corning shares jumped as much as 21% on the news.
In this deal, Nvidia could receive as many as 3 million GLW shares at a nominal price. It could also buy up to 15 million more shares at an exercise price of $180.
That may be a smart supply-chain move for Nvidia... It gives the company more leverage over a component (fiber optics) that Nvidia's chips need to run.
But as an investment, Corning needs to clear a higher bar...
We can see this through our Embedded Expectations Analysis ("EEA") framework, one of the tools we use at Altimetry.
The EEA starts by looking at a company's current stock price. From there, we can calculate what the market expects from the company's future cash flows. We then compare that with our own cash-flow projections.
In short, it tells us how well a company has to perform in the future to be worth what the market is paying for it today.
Fiber optics is an essential part of the AI build-out. But it's a historically lower-return business than chips. Case in point, Corning's Uniform return on assets ("ROA") has never surpassed 10%. (The U.S. corporate average is 12%.)
At Nvidia's $180 exercise price, Corning would need a Uniform ROA of 26% to justify that level. Take a look...
Investors are already pricing in a massive jump in Corning's profitability.
AI demand will help the company sell every fiber-optic cable it makes... and that could boost returns. But it may not be enough to meet investor expectations.
Nvidia's strategic move is bigger than Corning's stock...
The Corning deal signals AI's next bottleneck – in fiber optics. And we believe it's a net positive for the industry.
This partnership helps Nvidia protect its growth runway. Plus, it gives Corning a clearer path toward profitability.
That said, investors are already pricing in far more profitability than Corning has ever achieved. Fiber-optic demand alone may not generate the kind of returns they're anticipating.
Investors should heed this alarm... and steer clear of Corning's stock.
Regards,
Joel Litman
Editor's note: Nvidia CEO Jensen Huang has warned about one factor that could bring AI's growth to a halt... But on July 10, President Donald Trump is set to make a critical move that could solve this problem. When he does, a handful of stocks could soar as much as 50 times. And Joel has just teamed up with a special guest to reveal all the details, including how you can position yourself to profit.
Further Reading
"AI requires more energy than we're capable of producing," Joel writes. Power companies are scrambling to expand the grid – but they can't keep up with the growing need for energy. That means accessing enough power could be a country's greatest weapon in today's AI war.
"Most people make terrible investing decisions when they listen to their 'gut,'" Dr. David Eifrig says. You don't need a sixth sense to figure out how to be a good trader. But if you want to avoid making an emotional decision that tanks your portfolio, these three tools can help.
Market Notes
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