Investing.com -- Rosenblatt analyst Mike Genovese believes the recent DeepSeek-related sell-off in the optical and Ethernet networking space is “likely a head fake,” urging investors to buy the dip.
Chinese AI startup DeepSeek sent shockwaves through the global tech stocks on Monday, including Optical transceiver names like Lumentum Holdings Inc (NASDAQ:LITE) and Applied Optoelectronics (NASDAQ:AAOI), and Ethernet Switch (NYSE:SWCH) stocks such as Fabrinet (NYSE:FN).
Genovese is skeptical about DeepSeek’s claims about training efficiency and cost of its AI model R1, such as completing training on 2,048 Nvidia (NASDAQ:NVDA) H800 GPUs for under $6 million.
"We tend to believe DeepSeek's claims about its infrastructure are not true, and R1 was likely trained on a much larger and more advanced compute cluster," Genovese said in a note.
“In our opinion, it is more than likely DeepSeek used many more advanced GPUs than it claims, and this makes sense given trade restrictions and opportunity to be disruptive in more ways than one,” the analyst added.
Despite the initial market turmoil, Rosenblatt does not expect US hyperscalers to pull back on capital expenditures (capex)in response to DeepSeek.
Genovese highlighted that major players are projected to grow their capex by over 20% in 2025, building on $250 billion in 2024 investments. These funds will support large-scale GPU clusters and AI infrastructure, including plans for clusters scaling up to 1 million GPUs.
"The US AI industry will keep its foot on the capex gas," he asserted.
Rosenblatt’s optimism extends to the AI optical transceiver market, which is forecast to grow at a 24% compound annual growth rate (CAGR) from $7.4 billion in 2024 to over $17 billion by 2028.
Within this space, Lumentum and Applied Optoelectronics stand out due to their customer wins and technology leadership. Genovese also favors Fabrinet, citing its role in Nvidia’s AI transceiver production, and views the recent sell-off as overdone.
In addition to the transceiver segment, the AI Ethernet switch market is expected to expand rapidly, with a 51% CAGR projected from $4 billion in 2024 to $20 billion by 2028. Cisco (NASDAQ:CSCO) is seen as a key beneficiary of this growth, while Rosenblatt remains cautious on Arista Networks (NYSE:ANET) due to valuation concerns and competitive pressures.
Genovese also drew parallels between DeepSeek and Huawei, suggesting that DeepSeek’s pricing strategies and free offerings in the US market resemble Huawei’s prior aggressive tactics.
“DeepSeek reminds us of Huawei in several ways, including taking short-cuts and not necessarily respecting US intellectual property laws,” Genovese noted.
“There is also the fact that DeepSeek was offered for free to US consumers, which is reminiscent of Huawei's discounting, vendor financing and willingness to have heavy loss-leaders.”
The analyst questioned the long-term adoption of DeepSeek by Western enterprises, citing data security risks and the potential for regulatory bans.
Apart from the aforementioned stocks, Rosenblatt’s other favorite names in the sector include ADTRAN Inc (NASDAQ:ADTN), Ribbon Communications (NASDAQ:RBBN), Extreme Networks (NASDAQ:EXTR), and Calix (NYSE:CALX).
This content was originally published on Investing.com