The battle between light and copper is intensifying—where does the difference in expectations lie?

The battle between light and copper is intensifying—where does the difference in expectations lie?

Shares of optical interconnect companies have risen over 50% this year, while companies specializing in copper connectors have faced significant sell-offs. This valuation disparity is emerging as the primary structural contradiction investors are focusing on as OFC (Optical Fiber Communication Conference) approaches.

According to JPMorgan’s latest research report, Nvidia will highlight the critical role of large-scale optical expansion in enhancing computing system performance at the conference, and optical suppliers’ confidence in demand visibility will further strengthen.

Meanwhile, forecasts for the Optical Circuit Switch (OCS) market size have been significantly revised upward, and telecom-side products are expected to return to a high-growth track as demand for Data Center Interconnect (DCI) accelerates.

However, JPMorgan also points out that the stark valuation gap between optical communication stocks and copper connector stocks has led to a "severe" pessimistic pricing for copper connector companies in the market, making copper connector companies stand out for their post-OFC reversal potential. APH has declined 2% year-to-date, TEL down 8%, and CRDO down 28%.

Optical sector continues to strengthen, CPO shifts from bearish to bullish

The bearish arguments that troubled the market about optical transceivers last year have quickly faded. The JPMorgan report shows that growth in transceiver business is happening in sync with accelerated orders for Co-Packaged Optics (CPO), with dual drivers dispelling previous pessimism. The average share price increase for stocks covered in the optical sector this year is over 50%.

Regarding CPO, the market narrative has evolved from bearish to neutral and now bullish. Early concerns that CPO’s adoption would compress transceiver revenue have been disproven—CPO brings incremental revenue opportunities that supplement rather than replace growth expectations for relevant companies.

Industry analysts predict that the CPO market size will grow from less than $500 million in 2027 to about $10 billion in 2030, with scale-up rather than scale-out applications as the main growth engine.

Investor focus has also shifted: After recognizing that optical companies broadly benefit from CPO, the next core question is differentiation between CPO winners and losers. JPMorgan believes Coherent and Lumentum, with existing orders and Nvidia’s supply chain-focused investments, have firmly established themselves as CPO winners.

OCS market exceeds expectations, threats to copper connector companies are overestimated

OCS is another rapidly emerging opportunity. According to JPMorgan, the 2030 OCS market size forecast has been raised from $1–2 billion a year ago to over $4 billion, while previous annual market size was less than $500 million.

Among OCS supply chain beneficiaries, JPMorgan expects Coherent and Lumentum to be main winners, and Celestica to benefit as well. Currently, differentiation among suppliers is limited, and customers prefer to engage multiple suppliers to handle rapid scaling.

Regarding concerns about copper connector companies, JPMorgan believes these are clearly overstated. JPMorgan expects the scale-up application of optics/CPO will mainly be deployed between racks by the end of this decade, with in-rack replacement progressing much more slowly. Furthermore, non-Nvidia computing platforms remain very limited in their current willingness to adopt CPO.

JPMorgan emphasizes that after OFC, the "better than pessimistic expectations" fundamental trajectory of copper connector companies may have stronger share price driving power than further strengthening of the optical sector’s fundamentals.

Lumentum: Long-term financial targets expected to be significantly revised upward

Lumentum is one of the most prominent companies at this OFC. JPMorgan expects management will release significantly revised long-term targets at their investor briefing.

JPMorgan expects Lumentum will raise its 2030 market forecast to about $60 billion (about +35% annual compound growth), including roughly $45 billion for datacom, $10 billion for telecom, and $5 billion for OCS—a substantial increase from the previous estimate of about $30 billion in 2029.

Regarding financial targets, Lumentum previously set quarterly revenue targets at about $750 million, while the company’s guidance for F3Q26 (ending March) is close to $800 million, achieving the target ahead of schedule.

JPMorgan expects the company will use this as a basis to propose a medium-term goal of doubling revenue within the next 12–18 months, with quarterly revenue potentially reaching about $1.6 billion. Among sources for doubling, OCS is expected to contribute about 35%, CPO about 25%, with the rest from datacom chips and transceivers.

In the longer term, driven by continued ramp-up in CPO and datacom chips, quarterly revenue is expected to exceed $2 billion, gross margin to approach 50%, operating margin to nearly 40%, and per-share earnings capability to be in the $25–30 range.

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