JPMorgan: Light is good, but too expensive; downgrades Corning rating

The optical networking sector represents the most aggressive hardware sub-sector in terms of valuation expansion within this round of AI infrastructure investment cycles. However, JPMorgan argues that the current high premium has prematurely discounted overly optimistic earnings scenarios. The logic driven by fundamentals is yielding to valuation constraints, necessitating a more prudent approach to stock selection.

According to data from the trading desk, JPMorgan downgraded Corning's rating from "Overweight" to "Neutral" on April 16, raising its price target from $115 to $175 (based on a 2028 forward earnings per share (EPS) estimate of $5.20, discounted at a 35x Forward Price-To-Earnings multiple). With Corning's stock trading around $168, the new target implies only about 4% upside potential. Analysts believe the current stock price fully prices in buyers' "blue sky" scenarios regarding significant fiber price hikes and the large-scale deployment of AI. However, approximately 60% of Corning's non-optical business, execution risks related to capacity construction, and uncertainties surrounding the pace of large-scale adoption in optical networks have not been adequately reflected in the valuation.

Data from JPMorgan shows that the year-to-date NTM P/E ratio for optical networking stocks has surged by as much as 50%, leading all sub-sectors they cover. The overall valuation of AI-related hardware suppliers carries a premium of 83% compared to historical averages, with the pricing of the optical networking sector being particularly prominent. Current valuation levels require investors to look as far ahead as 2028 to justify significant upside potential from a fundamental perspective, contrasting with network/switch or certain IT hardware companies, which can support their upside logic based solely on 2027 earnings forecasts.

From a fundamental standpoint, JPMorgan does not hold a pessimistic view on the demand outlook for Corning's fiber business and has simultaneously raised its revenue and earnings forecasts. However, analysts argue that this improvement is already fully, if not excessively, reflected in the current valuation. The investment thesis has shifted from "fundamentals keeping up" to "valuations running too fast."

Optical Networking Sector: High Valuation Premium, 2028 Visibility Becomes Key Threshold

Optical networking is a core beneficiary of the AI infrastructure construction cycle and the hardware sub-sector with the most aggressive valuation expansion since the beginning of the year. Statistics from JPMorgan indicate that the year-to-date NTM P/E ratio for optical networking stocks has risen by 50%, significantly outpacing other AI-related sectors such as test and measurement (+44%) and HDD. Meanwhile, valuation premiums for EMS, network/switches, and IT hardware sectors have remained relatively flat or contracted year-to-date.

However, this rapid valuation expansion has placed the optical networking sector in an awkward position: investors must be willing to anchor their earnings expectations to 2028 to find sufficient valuation support for current stock prices. The true earnings inflection point brought about by the large-scale deployment of AI for most optical networking companies is not expected to be fully realized until 2028. In contrast, EMS, network/switches, and even some IT hardware companies can support their stock price upside logic using only 2027 earnings forecasts, without relying on more distant assumptions.

Against this backdrop, JPMorgan adopts a more selective allocation strategy for the optical networking targets it covers. The bank maintains "Overweight" ratings on Ciena, Coherent, and Lumentum, citing clearer visibility into their 2028 earnings inflection points and relatively well-defined paths for earnings growth derived from Scale-across and Scale-up opportunities. Conversely, companies whose valuations have already surged significantly and still require improved visibility into 2028 earnings are subject to downgrades or cautious treatment.

Corning: Favorable Fiber Demand Outlook, But Valuation Outpaces Fundamentals

JPMorgan attributes the downgrade of Corning's rating to valuation issues rather than weakening fundamentals. Analysts remain positive about the demand outlook for the fiber business and have correspondingly raised their revenue and earnings forecasts for the company.

In the updated forecasts, JPMorgan raised its total revenue forecast for Corning to $19.03 billion for 2026 (previously $18.6 billion), to $21.65 billion for 2027 (previously $20.9 billion), and established a new forecast for 2028 at $25.12 billion—representing an annual incremental revenue of approximately $1.4 billion, which even exceeds the incremental target of about $1.1 billion set by Corning's own Springboard initiative.

Revenue from the fiber business is projected to grow at a compound annual growth rate (CAGR) of approximately 30% over the forecast period, with AI/data center interconnect-related revenue growing at a CAGR of over 50%, surpassing the growth rates of data center capital expenditures and XPU shipments. EPS forecasts were accordingly revised upward: $3.20 for 2026 (previously $3.10), $4.15 for 2027 (previously $3.90), and a new forecast of $5.20 for 2028, corresponding to a CAGR of approximately 30%.

Nevertheless, JPMorgan believes the current stock price has priced in scenarios more optimistic than these forecasts. Corning's current NTM P/E ratio exceeds 50 times, and its 2027 expected P/E ratio exceeds 40 times. Analysts judge that buyer expectations have embedded "blue sky" scenarios involving significant price hikes for fiber optic cables/connectors and AI Scale-up opportunities. There is very little room for error left regarding the linearity of capacity construction, the pace of large-scale adoption in optical networks, and the non-optical business, which still accounts for about 60% of the company's total earnings.

Fiber Pricing: Risk of Overestimation by Buyers

JPMorgan questions the core assumptions behind the buyers' arguments. According to interactions between analysts and investors, current optimistic expectations for Corning held by buyers embed the assumption that fiber prices will rise significantly (by over 30%), anticipating that similar price hikes will eventually push Corning's fiber business margins above existing optical equipment levels over the next few years.

JPMorgan believes this expectation carries a risk of overestimation. While spot prices for industry fibers have indeed risen year-to-date, driven by heightened concerns over supply constraints following Meta's signing of a capacity lock-in agreement with Corning, most of Corning's existing capacity is already contractually locked for a small number of large, concentrated customers. In pricing negotiations with these clients, Corning's bargaining power is relatively limited. JPMorgan assesses that price increases in the spot market will only benefit a small portion of customer procurement, resulting in a net positive impact on the company's overall finances that will be moderate, far below the level implied by current buyer expectations.

Valuation Framework: Discounting 2028 Earnings at 35x Implies Limited Upside

JPMorgan discounts Corning's 2028 EPS of $5.20 at a target P/E multiple of approximately 35 times, arriving at a December 2026 price target of $175. This implies only about 4% upside potential compared to the current stock price of approximately $168. A premium valuation multiple of 35x reflects recognition of Corning's unique competitive position—as a US-based, vertically integrated, large-scale supplier of fiber optic cables and connectors, it possesses scarce attributes in the wave of AI infrastructure construction.

However, JPMorgan also points out that if a sum-of-the-parts valuation method is used, the combined valuation of optical and non-optical assets would be dragged down by the discount applied to the latter's low growth rate, resulting in an overall valuation multiple lower than that of pure-play optical networking peers. The improvement in optical business earnings is real—JPMorgan expects optical operations to contribute approximately 60% of the company's total earnings by 2028—but the amplification effect of this improvement on the company's overall revenue and earnings will be lower than the higher elasticity scenario assumed by buyers. Analysts believe that at current valuation levels, for Corning's stock price to achieve substantial upside, it requires establishing clearer visibility into 2028 earnings—a condition that is currently not sufficiently met.