The entire optical communication industry’s production capacity has sold out. Where is the current point of contention?

The entire optical communication industry’s production capacity has sold out. Where is the current point of contention?

The ongoing wave of AI data center construction continues to drive demand for optical communications, with related stocks rising sharply recently and valuations breaking through historical ranges across the board.

According to the Wind Trading Desk, Morgan Stanley released a research report on April 20, stating that after OFC (Optical Fiber Communication Conference), a new wave of investors continues to flock to the optical communications sector. Buying power is still expanding, providing sustained support for stock prices.

Multiple optical communications companies have sold out their production capacity for this year, significantly reducing revenue uncertainty, and profit margins are becoming the most critical metric for the next few quarters.

The progress of laser capacity expansion remains unclear, making it difficult to gauge the supply-demand gap. Attention should also be paid to the "narrow-fast" vs "wide-slow" architecture debate, as the "wide-slow" solution introduces the possibility of MicroLED replacing InP lasers, potentially reshaping the long-term supply chain landscape.

Morgan Stanley raised the target prices for four major optical communication stocks: Corning from $127 to $140; Lumentum from $595 to $710; Coherent from $250 to $290; and Ciena from $286 to $405.

Sold-out capacity reshapes the game logic, profit margins become the core variable

Against the backdrop of tight capacity across the board, the investment logic for the optical communications sector has quietly shifted. Since the capacity of many companies is locked in for this year or most of 2026, revenue forecasts have become relatively clear, shifting market attention to whether companies can effectively capture rising profit margins in a tight supply landscape.

On this front, LITE currently holds the greatest advantage. The company has continuously raised prices aggressively, which is the key reason its buy-side expected EPS is much higher than sell-side consensus. However, this pricing power may not be replicable across the entire supply chain.

The situation for GLW is more complex. The price of Asian optical fiber has risen 75%, hitting a 7-year high, and investors are anticipating whether GLW can benefit simultaneously. However, GLW management remains cautious, stating that "there is enough fiber globally to meet demand," and price improvements will be more driven by product innovation rather than direct spot price increases.

Two marginal changes also require attention: First, more than 30% of BEAD funding (U.S. broadband infrastructure subsidies) will shift to fixed wireless and satellite directions, potentially reducing fiber demand;

Secondly, after CommScope's fiber business was sold to Amphenol, Corning cancelled its raw fiber material orders to CommScope, triggering a chain reaction of order cancellations, which has slightly tightened the fiber market.

Laser capacity expansion progress unclear, supply schedule is a key unknown

Indium Phosphide (InP) lasers are the core component of current AI optical interconnect, and their capacity dynamics directly affect the supply-demand pattern of the entire supply chain, making it one of the top concerns for investors.

From publicly disclosed information:

LITE plans to expand EML capacity by over 50% in fiscal year 2026;

COHR plans to double capacity in fiscal 2026 and add another 100% in fiscal 2027;

Sumitomo Electric plans to double capacity from 2024 to 2026, and increase another 40% from 2026 to 2028;

Broadcom said it will expand capacity 4 to 6 times within the next year.

However, several key variables remain unclear.

Firstly, there is a dispute over the allocation ratio between EML and CW lasers in 1.6T demand—LITE predicts CW will account for about 30% to 40%, while Sumitomo thinks it will exceed 50%.

Secondly, many manufacturers are switching to 6-inch wafers, and the yield situation is still highly uncertain. Also, the details of Broadcom's expansion remain unclear.

Due to lack of reliable market share data and only LITE having disclosed relatively detailed capacity expansion information, the accuracy of the overall supply-demand model is limited. Whether the timing of supply expansion matches the growth rhythm of AI demand will be an important variable affecting sector sentiment.

The "narrow-fast" vs "wide-slow" architecture debate may reshape long-term supply chain dynamics

In the field of CPO (Co-Packaged Optics), the debate between "narrow-fast" and "wide-slow" architectures is becoming a long-term topic of increasing focus for investors.

The "narrow-fast" solution achieves higher single-channel rates with fewer channels, with a typical configuration of 1.6T = 8 channels × 200G, optimizing bandwidth density and power efficiency, which is currently the mainstream direction for AI cluster construction.

The "wide-slow" solution achieves the same total bandwidth through more channels and lower single-channel rates, with a typical configuration of 1.6T = 16 channels × 100G. It relies on a more mature ecosystem but consumes more space and fiber resources.

The strategic significance of the "wide-slow" solution lies in its introduction of the possibility for MicroLED to replace InP lasers.

Microsoft's MOSAIC architecture is a representative of this direction—using imaging fiber (containing thousands of fiber cores) to carry large amounts of low-speed parallel optical channels, which can, in some scenarios, reduce reliance on InP lasers. COHR advocates that VCSEL technology also has competitiveness in the "wide-slow" architecture.

This debate is expected to take years to clarify, but it is already starting to affect the long-term positioning of COHR and LITE—if the "wide-slow" approach accelerates its penetration, suppliers currently relying on InP lasers as their core competitiveness may face greater long-term challenges, while MicroLED-related companies may benefit.

Valuations Break Historical Range, No Catalyst to Falsify "Bull Market Assumption" Yet

Current valuations for optical communications stocks have fully detached from historical averages, becoming another focal point of contention.

Major stocks such as CIEN, LITE, COHR, GLW are trading at 20 to 25 times projected EPS for 2028, whereas their average PE ratios over 10 years have been around 17 to 19 times. CIEN and LITE's current valuations are about three times their five-year historical averages.

By contrast, companies in storage and hard disk sectors (such as MU) have PE ratios still in the single digits to low teens. This stark divergence has prompted investors to frequently question the rationality of optical communication valuations.

The rationale for this premium comes from the following:

First, the application scenarios for optical communications continue to expand (Co-Packaged Optics CPO, Optical Circuit Switching OCS, Coherent Transmission, etc.), and the growth space is clearer;

Second, there is a significant gap between buy-side expected EPS and sell-side consensus, and most catalysts (such as new product ramp-ups and price increases) won't be realized until 2027-2028;

Third, unlike storage, optical communications currently lack recent data points that could falsify the bull market assumption, while AI capital expenditure remains strong, further supporting the valuation.

However, current valuation levels are historically high. If market events such as profit margin misses, large-scale capacity expansion by Broadcom lasers leading to supply-demand rebalancing, or worsened OCS competition occur, valuations face the risk of falling back to the high teens.

 

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The above content is from Wind Trading Desk.

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