In contrast to Goldman Sachs! Morgan Stanley: It's time to "take profits" on optical modules.
```
After several months of substantial gains, Morgan Stanley believes that the positive fundamentals of the optical module industry have largely been reflected in stock prices, and the institution has adjusted its ratings on several related stocks.
According to Trading Desk, Morgan Stanley released its latest research report stating that the positive fundamentals in this sector are already widely known and fully reflected in stock prices. The bank suggests investors take appropriate profit when market sentiment is high. This view contrasts sharply with Goldman Sachs' optimistic report at the end of August, in which Goldman Sachs argued that “valuations are still reasonable after the surge.”
The investment bank made significant adjustments to the ratings for several leading optical module stocks, among which Eoptolink was downgraded twice to “underweight,” marking the biggest change. Morgan Stanley warned that after Eoptolink achieved 338% year-on-year growth in 2Q25, its growth rate may slow down significantly in the next few quarters, which is more likely to trigger a valuation downgrade.
Since April, Eoptolink has risen by as much as 460%, Zhongji Innolight by 312%, TFC by 269%, and HG Tech by 62%. Morgan Stanley believes that although the growth outlook for AI infrastructure demand remains positive, the current level of market enthusiasm is unsustainable. Combining fundamental and valuation analysis, the bank advises investors to remain disciplined and take profits gradually.
Valuations Reach Upper Bound of Historical Range
Morgan Stanley’s cautious stance is mainly based on valuation considerations. The bank’s analysis shows that valuations for Zhongji Innolight and TFC have exceeded the historical +1 standard deviation level, indicating that the positive fundamentals are at least partially priced in. In contrast, Zhongji Innolight’s current valuation is below the +1 standard deviation level.
In terms of valuation changes, since early 2025, forward PE for Zhongji Innolight has risen from 14x to 24x, and for Eoptolink from 8x to 20x. Morgan Stanley believes that the current market consensus already regards Eoptolink as the world’s second largest supplier with the best gross margin, leaving limited room for further upside.
This contrasts with Goldman Sachs’ optimistic expectations at the end of August, where Goldman focused more on the certainty of demand growth, while Morgan Stanley places more emphasis on the safety margin in valuation and the sustainability of growth.
Diverging Prospects for the "YiZhongTian" Trio
For the three giants of the optical module industry—Eoptolink, Zhongji Innolight, and TFC—Morgan Stanley offers differentiated investment advice:
Eoptolink: Downgraded twice to “underweight,” target price 255 yuan. Morgan Stanley believes the current market consensus already sees the company as the world’s second largest supplier with the best profit margin, leaving limited upside.
Zhongji Innolight: Maintained “overweight” rating, target price 435 yuan. As a pioneer in 1.6T new products, the company is expected to achieve significant growth in 2026, with a positioning better than its peers.
TFC: Downgraded to “underweight,” target price raised to 142 yuan. The company's profit growth potential is already reflected in the current stock price, and its valuation exceeds the +1 standard deviation level.
Morgan Stanley has also maintained its “underweight” rating on HG Tech, citing relatively weaker fundamentals and higher valuation compared to peers. Target prices for YOFC and ZTE have been raised while keeping respective ratings unchanged, as their fundamentals have not yet reached an inflection point, but stock gains have reflected potential positives.
1.6T Products Become Key Catalyst
Looking ahead, Morgan Stanley sees the rapid ramp-up of 1.6T products as a potential catalyst for the second half of 2025 and 2026. Due to the delay in GB300 in early 2025, the shipment timetable for 1.6T optical modules is also negatively impacted. However, with resumed deliveries of high-end GPUs, 1.6T shipments should gradually increase in 2H25.
According to LightCounting data, 800G began mass production in 2024, and 1.6T will start commercial production in 2025–2026. Some optical module companies have already completed the verification stage for 1.6T products, and rapid volume growth in 2H25 and 2026 is expected to become an important driver of revenue and profit.
Morgan Stanley expects that with the incremental contribution from 1.6T products, optical module companies will likely maintain revenue growth in 2H25 and 2026. Meanwhile, demand for 800G will remain robust, helping offset the pressure on price and volume for relatively lower-end optical modules.
Risk Disclaimer and Limitation of LiabilityThe market is risky—invest cautiously. This article does not constitute personal investment advice and does not take into account the particular investment objectives, financial situation, or needs of any individual user. Users should consider whether any opinions, views, or conclusions in this article are applicable to their specific circumstances. You are responsible for investment decisions made based on this information. ```