In the optical module manufacturing sector, attention should be focused on first-tier manufacturers with strong material assembly capabilities. These companies exhibit robust and highly certain earnings performance for the current and upcoming year, and are also positioned to be among the first beneficiaries in Scale-Up optical interconnect scenarios. Within the upstream material supply chain for optical modules, emphasis should be placed on companies that have secured supplier qualifications with leading optical module manufacturers for light sources and lasers, and which demonstrate rapid production expansion and swift product iteration and upgrades. The core viewpoints are outlined below: The initial formation of a commercial AI closed-loop suggests that growth in "connectivity" is poised to lead AI hardware investment. With emerging trends such as multimodal large language models, agentic AI, and physical AI, the token consumption of large models continues to rise. The return-on-investment pathways for leading large model companies are becoming clearer, marking the preliminary appearance of a commercial closed-loop. The three key drivers propelling AI computing power growth are computation (per-card computing power), connectivity, and storage. Due to the limitations of Moore's Law, the increase in single-card computing power falls significantly short of societal expectations for the output of computing clusters, making "connectivity" the current optimal component for enhancing cluster output capability. To meet the rapidly growing demand for training and inference computing power, Cloud Service Provider (CSP) companies, both domestically and internationally, are progressively increasing capital expenditure while placing particular emphasis on upgrading the "connectivity" segment, represented by optical interconnects. It is believed that the share of the optical interconnect market within global capital expenditure is expected to continue rising in the future. The "Optics Inside the Rack" trend unlocks future growth potential for Scale-Up optical interconnects, with the NPO narrative logic gradually strengthening. AI applications, exemplified by AI Agents, have a strong demand for ultra-long context during inference processes. This drives a trend of rapid growth in the scale of accelerator cards within Scale-Up nodes of computing clusters, suggesting that "connectivity" could achieve exponential growth. According to Broadcom's predictions, the aggregate bandwidth demand for Scale-Up networks is typically an order of magnitude higher than that for Scale-Out networks. Concurrently, the bandwidth of copper interconnects is inversely proportional to transmission distance. Under high-bandwidth demands, optical interconnects are expected to achieve a "zero to one" penetration in Scale-Up scenarios, benefiting global leaders in optical interconnect. In Scale-Up networks, NPO balances performance with engineering complexity, can leverage the existing open, disaggregated optical ecosystem, and its narrative logic is anticipated to strengthen progressively in the second half of 2026 and into 2027. Scale-Out and Scale-Across networks are expected to maintain high-speed growth. Demand for optical modules in Scale-Out networks is generally driven by cluster expansion, network architecture iteration, and the large-scale deployment of ASICs. Scale-Across is emerging as the "third pillar" of AI computing, following vertical scaling (Scale-Up) and horizontal scaling (Scale-Out). The exponential bandwidth growth of Scale-Across drives demand for coherent optical modules. Materials have become a key variable differentiating growth among optical interconnect companies, with shortages expected to narrow in the second half of the year. Looking back at the first half of the year, material supply was a core variable affecting company growth. Looking ahead to the second half, improvements on the supply side are expected to lead to a sequential, quarter-on-quarter easing of shortages for core materials. In fact, shortages for some upstream materials may be comprehensively alleviated in the latter half of the year. Optical Fiber: Domestic Expansion Overseas and High-End Products Like Hollow-Core/Multi-Core Open Up New Growth Space It is posited that rising optical fiber prices in the first half have propelled fiber manufacturers' profitability to a new level. Subsequent core growth will primarily stem from two directions: first, the development of new markets represented by data centers, and second, structural opportunities brought by the volume ramp-up of high-end products like hollow-core fiber. Demand from AI data centers and unmanned aerial vehicles is driving changes in industry supply-demand dynamics, leading to rapid increases in optical fiber prices. Overseas manufacturers are slow to expand production, potentially allowing domestic optical fiber manufacturers to rapidly increase their market share. Simultaneously, novel fibers such as hollow-core and multi-core are expected to unlock entirely new market spaces, with industrial volume production imminent. Risk Warnings: Risks associated with slower-than-expected development of AI applications; risks of localized shortages in AI hardware; risks of cloud service provider capital expenditure falling short of expectations.
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