To The Moon

Optical vs. Copper? Why the Answer Is "Both" — And Why Both Are Booming

Recent U.S. stock earnings season data shows that companies in the data center interconnection sector generally have higher profit growth rates than traditional mainstream AI sectors, such as cloud services and chip sectors.

The reason is that as data center complexity increases and connection demands grow, the difficulty of cabling and signal integrity rises exponentially, leading to exceptional growth in the connector component sector. Recent financial reports from cloud giants show continued high growth in capital expenditures, which will create more opportunities for their interconnect suppliers.

Future data centers are expected to feature hybrid optical + copper architectures. There are three paths for data center expansion: Scale Up, Scale Out, and Scale Across, corresponding to vertical expansion, horizontal expansion, and cross-domain collaboration respectively. These three expansion methods increase demand for connection chips, optical interconnection, copper connections, and network connections at different levels.

At distances of several meters, copper connections have significant cost advantages over optical communications.

However, in the ultra-short Scale-Up field, CPO (co-packaged optics) and in the ultra-long Scale Across field, optical cables offer better cost advantages. The comparison between optical vs. copper is as follows:

A comprehensive list of recently reported earnings from relevant companies is shown below; among them, $Broadcom(AVGO)$   and $Marvell Technology(MRVL)$   are also major players in the connection field, but considering their product diversity, they are not listed separately in the table below.

Data Center Connectivity Includes Multiple Areas:

Optical Interconnection

1. In the optical interconnection sector, $Coherent (COHR.US)$ , $Lumentum (LITE.US)$ , and $Fabrinet (FN.US)$ are the main optical module companies. The most critical component of optical modules is the EML laser chip. Major players in the high-end laser field, besides COHR and LITE, mainly include Broadcom. It's worth mentioning that Fabrinet only does system-level packaging and manufacturing of optical modules and doesn't have its own optical module brand, resulting in relatively lower added value or gross margin.

2. Besides optical modules and EML lasers, the optical interconnection sector also has companies specializing in optical cables, such as $Corning (GLW.US)$.

3. In the future, Co-Packaged Optics (CPO) will bring incremental value to the optical interconnection sector, addressing the power consumption and density pain points of Scale-up compute node interconnection. Coherent stated in a recent conference call that pluggable optical modules will remain the dominant form in the Scale-Out field for the long term. $NVIDIA (NVDA.US)$ has already laid out its CPO supply chain. The market expects the CPO industry chain to generate substantial revenue volume starting in 2028.

Q&A: Why does Coherent have much lower revenue growth than Lumentum despite both being optical module companies?

The reason is related to revenue structure. In addition to data center optical communications, Coherent also has traditional telecommunications and industrial lasers, which are relatively slower-growing sectors that drag down Coherent's performance. Furthermore, Lumentum's EML lasers are more high-end, with higher market share and deeper moats.

Copper and Power Connections

Representative companies include $TE Connectivity (TEL.US)$, $Amphenol (APH.US)$, and $Credo Technology (CRDO.US)$. Credo Technology focuses on Active Electrical Cable, with this business accounting for over 65% of revenue; notably, Credo has a relatively high gross margin level, reaching 67.55% in the last quarter.

Besides cables, Amphenol, like TE Connectivity, manufactures high-speed connectors. However, TE Connectivity is not exclusively focused on data centers and also has significant influence in electric vehicle connectors, with its data center exposure being smaller compared to other companies.

Network Connections

Major manufacturers revolve around switching chips and switches. Leading companies in switching chips include Broadcom, Marvell, and $Microchip Technology (MCHP.US)$ ; while major switch companies include $Cisco (CSCO.US)$ , $Arista Networks (ANET.US)$ , and Juniper Networks (acquired by $Hewlett Packard Enterprise (HPE.US)$ last year).

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