The stock prices of optical interconnect companies have surged over 50% year-to-date, while companies focused on copper connectivity have faced significant selling pressure. This valuation gap is emerging as the key structural contradiction investors are watching closely as the Optical Fiber Communication Conference (OFC) convenes. According to a recent J.P. Morgan research report, NVIDIA is expected to emphasize the critical role of scale-up optics for computing system performance at the conference. Confidence among optical suppliers regarding demand visibility is also anticipated to strengthen further. Simultaneously, market size forecasts for Optical Circuit Switching (OCS) have been substantially raised. Telecom-side products are also expected to return to a high-growth trajectory, fueled by accelerating demand for Data Center Interconnect (DCI). However, J.P. Morgan also notes that the stark valuation disparity between optical communication stocks and copper connector stocks means that the market's pessimistic pricing of copper connector companies has become "harsh." This could make the potential for a reversal in copper connector stocks after OFC more pronounced. Amphenol (APH) is down 2% year-to-date, TE Connectivity (TEL) is down 8%, and Credo Technology Group (CRDO) has fallen 28%.
The upturn in the optical sector continues to gain strength, with Co-Packaged Optics (CPO) shifting from a bearish to a bullish narrative. The bearish arguments surrounding optical transceivers that troubled the market last year have rapidly dissipated. J.P. Morgan's report indicates that growth in the transceiver business is occurring alongside an acceleration in CPO orders, creating a dual driver that has dispelled prior pessimistic expectations. Stocks covered in the optical sector have seen an average price increase of over 50% year-to-date. Regarding CPO, the market narrative has completed a full cycle from bearish to neutral to bullish. Early concerns that CPO adoption would compress transceiver revenues have been disproven; instead, the incremental revenue opportunities from CPO are supplementing, not replacing, growth expectations for relevant companies. Industry analysts project the CPO market will grow from under $5 billion in 2027 to approximately $100 billion by 2030. Scale-up application scenarios, rather than scale-out, are identified as the primary growth engine. Investor focus has consequently shifted: after confirming that optical companies broadly benefit from CPO, the next critical question involves differentiating the winners and losers within the CPO space. J.P. Morgan believes Coherent and Lumentum have firmly established themselves as CPO winners, leveraging existing orders and targeted supply chain investments from NVIDIA. The OCS market is expanding beyond expectations, while threats to copper connector companies appear overestimated. OCS represents another rapidly emerging opportunity. J.P. Morgan has raised its 2030 market size forecast for OCS to over $40 billion, up significantly from the $10-20 billion predicted a year ago; the annual market size was previously under $5 billion. Among the beneficiaries in the OCS supply chain, J.P. Morgan expects Coherent and Lumentum to be the primary winners, with Celestica also seeing some benefit. Supplier differentiation is currently limited, as customers prefer to engage multiple suppliers to manage rapid volume increases. J.P. Morgan suggests concerns regarding copper connector companies are significantly overblown. The firm expects scale-up optical/CPO applications will primarily be concentrated in inter-rack deployments until the end of this decade, with intra-rack replacement progressing much more slowly. Furthermore, adoption willingness for CPO on non-NVIDIA computing platforms remains very limited currently. J.P. Morgan emphasizes that following OFC, a fundamental trajectory for copper connector companies that is "better than pessimistic expectations" could prove to be a greater driver for their stock prices than further strengthening of the optical sector's fundamentals. Lumentum is expected to significantly raise its long-term financial targets. Lumentum is one of the most closely watched companies at this OFC. J.P. Morgan anticipates that management will present a substantially revised long-term outlook during its investor briefing. J.P. Morgan expects Lumentum to raise its 2030 market forecast to approximately $60 billion (implying a ~35% CAGR), comprising roughly $45 billion for data communications, $10 billion for telecom, and $5 billion for OCS. This is a significant increase from its previous forecast of around $30 billion for 2029. Regarding financial targets, Lumentum's previously stated quarterly revenue target was approximately $750 million. The company's revenue guidance for F3Q26 (ending March) is already nearing $800 million, indicating the target has been achieved ahead of schedule. Based on this, J.P. Morgan expects the company to propose a medium-term goal of doubling revenue within the next 12 to 18 months, potentially reaching quarterly revenue of around $1.6 billion. Of this projected doubling, OCS is expected to contribute approximately 35%, CPO about 25%, with the remainder coming from data communication chips and transceivers. Looking further ahead, driven by continued volume growth in CPO and data communication chips, quarterly revenue could potentially exceed $2 billion. Gross margins may approach 50%, with operating margins nearing 40%, translating to earnings per share potentially in the range of $25 to $30.
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