By skyforbes - Introduction
- The Company
- Giga-Chads and Giga-Watts
- Co-Packaged Optics
- Optical Circuit Switching
- Taking Share from Competitor
- Industry Consolidation
- Tariffs
- Short Interest
- Catalysts
- Positions or Ban
1. Introduction : The Exploding Demand for Optical Bandwidth
As AI clusters and cloud infrastructure demand more and more networking bandwidth, electronic links in the datacenter are being confined to shorter and shorter distances.
Yet as these datacenters promise to consume exponentially more power to satisfy this massive bandwidth, operators are disaggregating them into disparate physical sites up to hundreds of miles apart in order to reliably deliver them the giga-Watts of power they require and adequately cool them.
Networking infrastructure both within and between datacenters is being increasingly built with photonic links.
For the same reasons — power, latency and reliability being paramount — operators are giving renewed attention to optics for datacenter switching in a slow but growing move away from traditional electrical packet switching.
I believe Lumentum ($LITE) is the optical product maker best-positioned to capitalize on these near- and far-term transformations.
2. The Company : Cloud Revenue Inflecting Upward, Massive Purchase from NVIDIA
Lumentum earns roughly 90% of its ~$500MM quarterly revenue from its optical transceivers and lasers chips for cloud and networking applications. It earns the remaining 10% from industrial and consumer segments, neither of which are covered here.
Its primary moneymakers are transceivers capable of up to 800G transmission and lasers capable of up to 200G modulation. Its EM Lasers are used as the light source for optical datacenter interconnect (DCI) and its narrow linewidth lasers light up 400ZR and 800ZR coherent optical links capable of 100km transmission. Operators like Meta, Microsoft, and AWS are deploying these 400ZR, 800ZR and eventually 1600ZR coherent links in massive quantities to connect up their datacenters and AI factories. These fiber links are lit by narrow-linewidth lasers, of which Lumentum's are considered best-in-class due to the higher yields on them they realize compared to competitors' lasers, per management commentary. This capability gives the company favorable "pricing latitude" and "price levers" per the CEO that, per the CFO, would provide further upside to the company's already-improving margins.
Lumentum's experience in developing high-power lasers for subsea fiber links gave them the foundation for development of the ultra-high-power lasers that NVIDIA has turned to for its 200G photonic-enabled switches with co-packaged optics (CPO). This commitment from NVIDIA, announced last quarter, is Lumentum's largest-ever purchase order. This arrangement is just in its early innings.
Lumentum's cloud-facing revenue is inflecting upward and drove Q42025 revenue above even the company's revised guidance. Cloud revenue grew 16% QoQ and 67% YoY. Management cites "exceptional" demand from hyperscalers for both their transceiver modules and laser components. Their modules revenue grew 50% QoQ, and management expects their components business to have a breakout year in 2026.
The company has expanded its US manufacturing capacity in order to produce more of its components State-side and meet the heavy demand for its products.
3. Giga-Chads and Giga-Watts : Distributed AI Factories and "Scale-Across" Infrastructure
That giga-chad Mark Zuckerberg is building giga-Watt datacenters.
NVIDIA is building networking switches with integrated photonics that connect "AI Factories" to millions of GPUs across physical sites.
Microsoft is spending $80bn on its regional Azure datacenters.
The massive energy consumption of these networked elements necessitates that they be disaggregated into multiple physical sites, all of which are linked by high-speed optics. NVIDIA terms this the "scale-across" network, expanding on their "scale-up" and scale-out" capabilities.
These ~100km links are built today with 400ZR/ZR+ coherent optical technology, which is ramping 30% YoY, while the industry is rapidly transitioning to 800ZR/ZR+ with 1600ZR/ZR+ on the horizon. Coherent optics require the high-power narrow-linewidth lasers that Lumentum specializes in: coherent module and DSP makers like Cisco, Ciena and Marvel are shipping as many of these as they can build. Lumentum signaled strong demand for these lasers in its 3Q24 report.
Lumentum's 100G and 200G EM Lasers are also in high demand. Providers are turning to 100G and increasingly 200G optics to satisfy the demands of their AI workloads in scale-out networks. Lumentum's 200G EM Lasers are on allocation and allow the company to take price as mentioned above.
4. Co-Packaged Optics : Key Ecosystem Partner in NVIDIA's "Scale-Out" Networks
Electrical interconnects within the datacenter are also being migrated to optical technologies.
Co-packaged optics (CPO) are the long-term answer to meeting AI networks' requirements for low latency, low power, high reliability and high faceplate density. Major switch makers like Broadcom, NVIDIA and Cisco are integrating optics right next to the switch silicon to simplify the connection to the optical fiber and eliminate the cost and power of the DSP that the switch otherwise has to connect to in a traditional external pluggable optical module. NVIDIA demonstrated that their switches with CPO photonics engines consume 67% less power than their pluggable switches.
CPO will eventually cannibalize the intra-DC pluggable module business.
CPO requires high-power lasers to light up the link's optical fiber. Last quarter, Lumentum reported their largest-ever PO, for their high-power lasers for a 200G CPO application. This is almost certainly for NVIDIA's CPO photonic switches. Lumentum appears for now to be the only vendor approved by them for these lasers: "We believe we have a good competitive moat that will keep us in that position (of being sole-sourced)".
I expect to hear of follow-on orders for CPO lasers in Lumentum's upcoming quarterly call: The company expects a "significant revenue ramp in CPO by the second half of calendar 2026."
Lumentum manufactures these lasers in a US fab, exempting them from any tariffs on this revenue, while also expanding capacity.
So, they are the vendor with the largest capacity to produce these lasers, of which theirs are the industry's best-performing, while being the sole supplier approved for NVIDIA's CPO switches.
A knock on CPO has been the perception of its inferior reliability compared to traditional pluggable modules. Meta dispelled this at the ECOC conference last month, stating, "While CPO’s value in substantially reducing power over traditional re-timed transceivers has been well established, the integrated nature of CPO and its impact to the reliability, availability, and serviceability at scale has been elusive… Within this initial time period spanning over 15 million device hours, we have observed zero unserviceable failures as well as a 5x improvement in link reliability compared to traditional pluggable optical modules… As we continue to explore innovative solutions offering reliable and power-efficient optical connectivity for the AI networks, these CPO reliability results reinforce its viability to address the future optical I/O challenges of data center network infrastructure."
CPO has been a technology long on the horizon of the optical networking industry, but its widespread adoption is imminent.
5. Optical Circuit Switching (OCS) : An New and Expanding Market
In the face of ballooning power DC and AI factory power consumption, hyperscalers and DC operators are showing renewed and increasing interest in OCS as an alternative, if not replacement, to electrical packet switching. OCS is not new, having had its moment in the sun in 1990s and early 2000s. Google was perhaps the first major DC operator to deploy it at scale in recent years, finding that it improved power by 40%, cost by 30% and uptime by 50x. OCS is particularly suited to AI applications because of its low latency and high reliability.
Last quarter, Lumentum reported the shipment of OCS evaluation units and more recently has announced additional OCS products, likely in response to customer interest. They have two hyperscalers signed onto their OCS platform with a third committed for 2026. Management said last quarter that OCS will bring "very, very significant revenue in Q1, Q2 and then certainly in the back half of calendar 2026."
So that's a second significant 2H2026 revenue inflection.
OCS is now a $100MM+ revenue source for the company with margins "significantly" above the corporate average and a time frame to significant revenue that is becoming "sharply clear that it's sooner rather than later."
6. Taking Share from Competitor
Coherent ($COHR) is Lumentum's primary US-based competitor vying to supply the networking industry with optical components (lasers, OCS, transceivers). We noted that Lumentum is sharply growing its cloud and datacom business. This appears to be coming at Coherent's expense, because even in this era of massive spending on network infrastructure and heavy demand for optical gear, they issued weaker-than-expected guidance last quarter. Their datacenter revenue growth continues to slow, to 24% from the prior quarters' 39%, 46% and 58%. Investors punished them severely for this miss, sending the stock down 20%.
Lumentum appears to be taking share: their datacom growth stands at 44% while Coherent's is only 4%. Lumentum as noted is presently the only laser vendor approved by NVIDIA for its CPO switches, while Coherent made no mention of any new POs or wins in the CPO space. Lumentum has the incumbent advantage here.
And in OCS, management states that they have been able "to capture volume opportunities earlier than competitors."
7. Industry Consolidation : Component Makers Get Snapped Up
The recent history of the optical networking industry shows numerous acquisitions. Barriers to entry have grown as bandwidths increase, dimensions shrink and semiconductor mask costs reach into the tens of millions. Smaller firms that develop key enabling technologies or components have been the ones to be snapped up.
Lumentum CEO Michael Hurlston has been through to this. He led Finisar when it was acquired by II-VI (now Coherent) in 2018.
On the flip side of the ledger, Lumentum acquired Neophotonics in 2021 to capture its expertise in building the narrow-linewidth lasers that have become a lynchpin of the coherent optics segment.
For motivations similar to those expressed in the quotes below, I believe Lumentum is on the short list of photonics suppliers that a larger system integrator, module maker or certain GPU networking giant would seek to acquire.
NVIDIA in particular could acquire Lumentum to secure its supply of lasers for its CPO switches, while also bringing in-house the engineering expertise needed to incorporate optical switching into its back-end AI network installations. Small OCS matrices like the 64×64 product Lumentum just announced would be well-suited to this application.
This of course is more speculative than my arguments of where Lumentum's near-term business is headed. Nonetheless it's a feasible outcome for the company and one I want exposure to.
- Nokia acquires Infinera for $2.3B, Feb. 2025: "This transaction will significantly improve our scale and profitability in optical networks, and allows us to speed up the pace of innovation to meet the requirements of the AI era."
- II-VI acquires Coherent for $6.6B, July 2022: "Coherent is an innovator with a rich portfolio of some of the most advanced technologies in the world, which have been transformative in a broad range of markets."
- Lumentum acquires Neophotonics for $900M, Nov. 2021: "With NeoPhotonics, we're making another important investment in better serving our customers and expanding our photonics capabilities at a time when photonics are at the forefront of favorable long-term market trends."
- Marvel acquires Inphi for $10B, Apr. 2021: "Inphi’s technologies are at the heart of cloud data center networks and they continue to extend their leadership with innovative new products, including 400G data center interconnect optical modules, which leverage their unique silicon photonics and DSP technologies."
- Cisco acquires Acacia for $4.5B, July 2019: "With the explosion of bandwidth in the multi-cloud era, optical interconnect technologies are becoming increasingly strategic. The acquisition of Acacia will allow us to build on the strength of our switching, routing and optical networking portfolio to address our customers' most demanding requirements."
- Cisco acquires Luxtera for $660M, Feb. 2019: "Coupled with our silicon and optics innovation, Luxtera will allow our customers to build the biggest, fastest and most efficient networks in the world."
- II-VI acquires Finisar for $3.2B, Nov. 2018: "Today our company is taking a giant leap forward in our scale to serve a significantly increasing addressable market."
8. Tariffs : Not a Threat
Tariffs have not materially affected Lumentum's financial performance and management has stated that they do not anticipate them to. But with our mercurial president at the helm, the risk that tariffs will be levied on optics is ever-present.
9. Short Interest : 15% SI, 5-Day D T C and 120% Institutional Ownership
While lower than the crazy 100%+ SI values we've aped on here, I consider 15% SI to be substantial, especially for a company in as strong of a position as Lumentum's. The stock has risen 200% over the past six months, during which time SI has hovered between 15% and 18%, implying they're in a neutral-to-losing position. The stock is on at least one broker's hard-to-borrow list. Its 4.7-day D T C and 120% institutional ownership imply a tight float.
If Lumentum publishes a strong earning report on Nov. 4 as I expect they will, one could envision a rush to close these short positions. I have a hard time seeing the bear case here.
10. Catalysts
As mentioned, Lumentum reports 2026Q1 results Nov. 4 after market close. I expect a solid earnings beat and positive guidance around additional CPO-related orders, 200G EM L laser volumes and favorable pricing, and inflecting OCS revenue.
Hearing of continuing high infrastructure CapEx from Meta, Microsoft and Amazon when they each report this week should also be viewed as beneficial to the stock.
A rush to cover short positions in response to a beat would provide further upward momentum.
11. Positions
I own 2100 shares, worth $440k at today's $191 share price. I opened Nov. 7 230C for leverage to Lumentum's earnings release, and Nov. 21 250C for leverage to NVIDIA's (Nov. 19). I may also buy calls with a further expiration to remain exposed to the longer-term industry migrations detailed here.
TLDR:
Lasers. Pew pew!