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Citi Names Top Communications Equipment Stocks as AI Spurs Data Center Spending
Summary
Citi analysts have identified Lumentum, Ciena, and Keysight as top picks in the communications equipment sector, citing projections for data center capital expenditure to grow over 80% in 2026 due to AI demand.
Citi analysts have highlighted their top U.S. communications equipment stocks, anticipating a multi-year expansion in networking infrastructure fueled by accelerating investment in artificial intelligence. The firm points to surging capital expenditure forecasts from major cloud providers as a key tailwind for the sector.
Soaring AI-Driven Demand
The outlook for networking infrastructure has strengthened significantly, according to Citi. Capital expenditure (capex) projections for fiscal year 2026 from the five largest cloud providers have been revised 16% higher compared to April estimates. Citi's own forecast points to aggregate data center capex growth exceeding 80% year-over-year in 2026, followed by more than 30% growth in 2027.
Market data from the first quarter of 2026 underscores this trend. According to industry research firm Dell’Oro, the front-end data center switch market grew by a mid-20s percentage year-over-year. The AI back-end Ethernet switch market saw even more explosive growth, surging more than 100% year-over-year to over $3.7 billion.
AdCiti's Top Sector Picks
Based on this robust outlook and factors like supply chain constraints for key components, Citi has identified three buy-rated stocks poised to benefit.
- Lumentum Holdings (LITE): The firm sees Lumentum as well-positioned to capitalize on the early adoption of advanced scale-up optics technologies. Citi notes the company could benefit from supply constraints in critical components like silicon and lasers.
- Ciena Corp (CIEN): Ciena led the optical transport market in the first quarter with a market share of over 25%, an increase of more than 300 basis points year-over-year. The overall market grew 20% in the same period, reflecting strong demand.
- Keysight Technologies (KEYS): Keysight is set to benefit from the broad infrastructure buildout required to support large-scale AI deployments. This view is supported by a recent rating upgrade from Morgan Stanley, which also cited the company's exposure to AI investment.
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