The AI data center construction wave continues to boost demand for optical communication, driving significant recent stock gains in related companies and pushing valuations beyond historical ranges. According to market analysis, Morgan Stanley issued a research report on April 20 noting that a new wave of investors continues to enter the optical communication sector following the OFC (Optical Fiber Communication Conference), with buying interest still expanding, providing ongoing support for stock prices. Multiple optical communication companies have sold out their production capacity for this year, substantially reducing revenue uncertainty, making profitability margins the most critical indicator for the coming quarters. The unclear progress on laser capacity expansion makes it difficult to assess the supply-demand gap. Attention is also turning to the competition between "Narrow and Fast" versus "Wide and Slow" architectural approaches. The "Wide and Slow" approach introduces the possibility of replacing InP lasers with MicroLEDs, which could reshape the long-term supply chain landscape. Morgan Stanley raised price targets 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.
Capacity Sell-Out Reshapes Investment Logic, Margins Become Core Variable Amid industry-wide capacity constraints, the investment thesis for the optical communication sector has shifted. With many companies' capacity booked through this year or most of 2026, revenue forecasts have become relatively clear. Market attention has consequently turned to which companies can effectively capture upside in profit margins within the tight supply environment. On this front, Lumentum currently holds the strongest position. The company has been aggressively raising prices, which is the core reason buyer EPS expectations are significantly higher than sell-side consensus estimates. However, this pricing power may not be replicable across the entire supply chain. The situation for Corning is more complex. Asian fiber prices have risen 75%, hitting a 7-year high, leading investors to question whether Corning will benefit similarly. But Corning's management has expressed a conservative stance, stating that "there is sufficient fiber globally to meet demand," and that price improvements will be driven more by product innovation than direct spot price increases. Two marginal changes also warrant attention: First, over 30% of BEAD funds (U.S. broadband infrastructure subsidies) are expected to shift towards fixed wireless and satellite solutions, likely reducing fiber demand. Second, following the sale of CommScope's fiber business to Amphenol, Corning canceled its raw fiber orders with CommScope, leading to a chain reaction of order cancellations and slightly tightening the fiber market.
Unclear Laser Capacity Expansion Timeline Makes Supply Pace a Key Unknown Indium Phosphide (InP) lasers are core components for current AI optical interconnectivity. Their capacity dynamics directly impact the entire supply chain's supply-demand balance and are a key focus for investors. Based on publicly available information: - Lumentum plans to expand its EML capacity by over 50% in fiscal year 2026; - Coherent plans to double capacity in FY2026 and increase it by over 100% again in FY2027; - Sumitomo Electric plans to double capacity from 2024 to 2026, then increase it by 40% from 2026 to 2028; - Broadcom stated it will expand capacity by 4 to 6 times within the next year.
However, several key variables remain uncertain. First, the allocation ratio between EML and CW lasers for 1.6T demand is debated – Lumentum estimates CW lasers will comprise about 30-40%, while Sumitomo believes it will exceed 50%. Second, many manufacturers are transitioning to 6-inch wafers, where yield rates still carry significant uncertainty. Additionally, specifics of Broadcom's capacity expansion plans are not yet clear. Due to a lack of reliable market share data and only Lumentum disclosing detailed capacity expansion plans, the precision of overall supply-demand models is limited. Whether the timing of supply expansion aligns with the pace of AI demand growth will be a crucial variable influencing sector sentiment.
"Wide and Slow" vs. "Narrow and Fast" Architecture Debate May Reshape Long-Term Supply Chain In the CPO (Co-Packaged Optics) domain, the competition between the "Narrow and Fast" and "Wide and Slow" architectural approaches is becoming an increasingly important long-term topic for investors. The "Narrow and Fast" approach achieves higher per-channel speeds with fewer channels—a typical configuration is 1.6T = 8 channels × 200G—optimizing bandwidth density and power efficiency. It is the current mainstream trend for AI cluster construction. The "Wide and Slow" approach uses more channels with lower per-channel speeds to achieve the same total bandwidth—a typical configuration is 1.6T = 16 channels × 100G. It relies on a more mature ecosystem but consumes more space and fiber core resources. The strategic significance of the "Wide and Slow" approach is that it introduces the possibility of replacing InP lasers with MicroLEDs. Microsoft's MOSAIC architecture is representative of this direction—using imaging fiber (containing thousands of cores) to carry numerous low-speed parallel optical channels, potentially reducing reliance on InP lasers in certain scenarios. Coherent argues that VCSEL technology is also competitive within the "Wide and Slow" architecture. This路线竞争 is expected to take several years to resolve but is already influencing the long-term positioning of Coherent and Lumentum. If the "Wide and Slow" approach gains traction faster, suppliers whose core competency is currently InP lasers could face greater long-term challenges, while MicroLED-related companies could benefit.
Valuations Break Historical Ranges, No Near-Term Catalyst to Disprove "Bull Case" Optical communication stocks are now trading at valuations that have completely departed from their historical average ranges, becoming another core point of debate. Key stocks like Ciena, Lumentum, Coherent, and Corning are currently trading at 20x to 25x their projected 2028 EPS, whereas their 10-year average P/E ratios mostly fall within the 17x to 19x range. Ciena and Lumentum's current valuations are approximately three times their respective five-year historical averages. In contrast, memory and hard disk drive companies (like Micron) still trade at single-digit to low-teens P/E ratios. This significant divergence frequently prompts investor questions about the rationality of optical communication valuations. The justification for the premium rests on several points: First, the application scenarios for optical communications continue to expand (CPO, Optical Circuit Switching OCS, coherent transmission, etc.), making growth prospects clearer. Second, there is a substantial gap between buyer EPS expectations and sell-side consensus estimates, with many catalysts (such as new product ramps and pricing effects) not expected to materialize until 2027-2028. Third, unlike the memory sector, the optical communication sector currently lacks near-term data points that could disprove the bullish thesis, while robust ongoing AI capital expenditure further supports valuations.
However, current valuations are historically elevated. Should the market encounter scenarios like profit margins falling short of expectations, a significant Broadcom laser capacity expansion leading to supply-demand rebalancing, or a worsening competitive landscape in OCS, valuations risk reverting to the high-teens range.
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