Paving the way for the release of the new CPO solution? Nvidia heavily invests in optical interconnects, aiming to establish a "supply safeguard" for CPO.

Paving the way for the release of the new CPO solution? Nvidia heavily invests in optical interconnects, aiming to establish a "supply safeguard" for CPO.

NVIDIA spends $4 billion to acquire shares in two major optical communication giants, locking in key production capacity ahead of the "optical interconnect" era for next-generation AI computing architectures.

On March 2nd, local time, NVIDIA announced it had established multi-year partnerships with optical communication component manufacturers Coherent and Lumentum. The partnerships include collaborative R&D in optical technologies, future capacity and supply priority arrangements, and NVIDIA’s “multi-billion-dollar” multi-year purchase commitments. Additionally, NVIDIA will invest $2 billion each in the two companies to support their R&D, future capacity, and operational expansion in the United States.

According to Windchase Trading Desk, JPMorgan North America equity research team analyzed that the two deals are “substantially similar” in structure and intent:

Both are non-exclusive, multi-year advanced optics collaborations;Both include “multi-billion-dollar purchase commitments”;NVIDIA will invest $2 billion each in Coherent and Lumentum to expand U.S. manufacturing capacity and support R&D; both companies mention NVIDIA will receive common stock in exchange for this investment.

Barclays’ latest research report directly states that the core demand of NVIDIA’s investment is “supply protection” for co-packaged optics (CPO).

The report writes: “The primary motivation for these transactions is to secure supply for NVIDIA in both scale-out and scale-up CPO interconnects.” According to Barclay’s analysis, this is more akin to "pre-stocking" for the advancement of a larger-scale "optical interconnect" era, rather than a short-term supply-demand disruption.

It’s like booking an entire orchard before the fruit is ripe. As AI cluster sizes expand, traditional pluggable optical modules will face physical limits in power consumption and density. CPO (co-packaged optics)—integrating optical components directly with GPUs—is becoming an inevitable trend. CPO integrates pluggable transceivers directly into switches, reducing hardware procurement costs for data center operators and significantly lowering network energy consumption.

“Where the money goes”: Lasers, InP production lines, and U.S. factory construction

From the disclosed details, NVIDIA is betting not on generic “optical interconnect modules,” but on the key light sources and core components capacity needed for CPO.

Barclays believes, “We think most of this deal targets 400mW continuous-wave (CW) lasers.” JPMorgan also emphasizes that the Coherent partnership covers multiple product types, “including ultra-high-power CW lasers for CPO.”

JPMorgan revealed specifics on how the funds will be used. NVIDIA’s investment is mainly to expand the U.S. manufacturing capabilities and support R&D at both companies.

For Coherent, this unrestricted funding of up to $2 billion will primarily go toward capital expenditure, especially expanding the indium phosphide (InP) production capacity at its Sherman, Texas plant. The multi-billion-dollar purchase commitment will start in early 2027 and last until 2030.

For Lumentum, most of the funds will be used to build a “brand new” wafer fab in the U.S. Previously, Lumentum disclosed an expected “hundreds of millions of dollars” purchase order to be fulfilled in early 2027, but NVIDIA’s new order is entirely incremental, with revenue expected to be realized starting from the second half of 2027.

Timeline: Orders will be fulfilled later, pointing to supply-demand dynamics after 2027

For the market, the key question is whether revenue recognition will “immediately appear on financial statements.” The research reports lean toward “later fulfillment.”

JPMorgan says Coherent’s “multi-year, multi-billion-dollar purchase commitment” is expected to start in early 2027 and continue until 2030. For Lumentum, the new agreement is incremental to existing orders: previously disclosed “hundreds of millions of dollars” purchase orders are expected to be fulfilled in early 2027, and incremental revenue from this new partnership will likely begin in the latter half of 2027 and beyond.

This explains, to some extent, why NVIDIA’s move is being interpreted as “pre-allocating capacity”: CPO aims to solve AI cluster interconnect bottlenecks at higher bandwidth and lower power, and its ramp-up resembles an industry migration rather than a single-quarter sales boost.

Industry chain significance: Electrical interconnect won’t disappear immediately, but “phased replacement” signals are stronger

Barclays expects two types of rapid market reactions:

First, “This is negative for electrical connection-related companies (like CRDO)”, because securing supply means shorter-distance CPO connections may advance sooner; however, Barclays also half-jokingly reminds with a “phased” assessment—“Does this mean all electrical connections are about to be eliminated? (Of course, we’re joking)”—and reiterates that electrical interconnects will remain important in the short term, with the impact mainly seen in long-term structural changes.

Second, the transactions further reinforce the theme of expanding the domestic U.S. supply chain. Barclays believes the deals “do not directly target optical modules,” but may prompt more cautious market sentiment toward module makers that are “non-U.S.”

Additionally, Barclays notes the timing of transaction disclosures is “not unexpected” because NVIDIA is likely to publicly discuss new CPO solutions at the GTC conference. If the subsequent GTC conference reveals a clearer path to productization, the above “capacity lock-in” could make it easier for the market to reassess the pace of CPO advancement.

 

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The above content is from Windchase Trading Desk.

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