Marvell Eyes a Swing for the AI Networking Fences as Markets Weigh Lumentum Price Tag

Marvell Technology NASDAQ: MRVL is reportedly gearing up to make an acquisition of epic proportions. According to multiple outlets, the company is in advanced talks to buy communications equipment giant Lumentum NASDAQ: LITE, and a deal could be announced as soon as next week.

On the surface, the deal could make a lot of sense. Lumentum is growing rapidly as the company rides one of the strongest waves in AI infrastructure: optical networking, a space that Marvell also participates in.

Additionally, both firms have partnerships with the world’s leader in AI infrastructure, NVIDIA NASDAQ: NVDA, an alignment that could boost the deal's potential.

However, after the news broke, Marvell shares took a massive hit. The stock dropped about 13%, Marvell’s largest single-day decline in over four months.

Despite the significant benefits that a deal could provide Marvell, its hefty price tag appears to be spooking investors, and not without good reason.

The Optical Networking Opportunity

To understand the implications of this deal, it is important to understand optical networking and how Marvell and Lumentum participate. Optical networking refers to connecting various data center components via fiber-optic cables rather than traditional copper cables.

Over time, companies and industry analysts expect optical networking solutions to become critical in data center deployments. This is due to their superior ability to transfer large amounts of data at high speeds over long distances.

As AI pods and clusters become larger and need to process more information, the physical limitations of copper become increasingly difficult to work around, creating a greater need for optical solutions. Highlighting the scale of the optical networking opportunity, Lumentum believes its optical AI total addressable market will expand from $18 billion in 2025 to over $90 billion in 2030.

Where Marvell and Lumentum Sit in the Optical Networking Ecosystem

While investors often associate Marvell with custom AI accelerators, optical networking is actually a larger business for the firm. Marvell notes that optical interconnects account for around half of its data center revenue, while custom silicon accounts for approximately 25%. The company provides a variety of optical interconnect products, with a significant focus on digital signal processors.

However, according to Counterpoint Research, one thing that Marvell does not supply, and actually buys from Lumentum, is indium phosphide (InP) lasers. InP lasers are critical components in optical networking products, including those with very high growth potential like co-packaged optics (CPO). In its high-end scenario, Goldman Sachs estimates the CPO market could rise from $1 billion in 2026 to nearly $71 billion in 2028.

The particularly valuable assets Lumentum holds, in Counterpoint’s view, are its InP laser fabs. This is because Lumentum and Coherent NYSE: COHR exert significant control here. Together, these firms own the majority of InP laser production capacity, and building new fabs takes years. Currently, there is a significant gap between supply and demand for lasers. At Citi’s 2026 Global TMT Conference, Lumentum said it does not expect this gap to close for several years.

Buying Lumentum would make Marvell a huge player in the InP laser market, giving it a position it could leverage to scale its optical networking business during a period of constrained supply.

The Marvell, Lumentum, and NVIDIA Connection

Another important through-line is that Lumentum and Marvell are both NVIDIA partners. In March, NVIDIA invested $2 billion in Lumentum. The agreement helps NVIDIA secure supply of advanced laser components and also supports Lumentum in building out a new InP laser fab.

Around the same time, NVIDIA invested $2 billion in Marvell and announced a strategic partnership. Marvell is part of NVIDIA’s NVLink ecosystem, which allows customers to combine Marvell’s custom accelerators and compatible networking solutions with NVIDIA chips. By purchasing Lumentum, Marvell could further strengthen its relationship with NVIDIA, reap the direct financial benefit from Lumentum’s agreement to supply lasers to NVIDIA, and increase demand for its optical networking solutions. The acquisition could also aid cross-selling of its custom chips.

Marvell’s Potential Lumentum Purchase: More Than a Pretty Penny

A key reason why Marvell shares dropped on this news is the deal’s price. In 2026, Lumentum shares are up approximately 150% and have risen around 330% in the past 52 weeks. The company now has a market capitalization of approximately $83 billion. The price is also likely to be higher than this, as acquirers typically have to pay a significant premium to induce investors to sell. Even at $83 billion, this would be equal to around 43% of Marvell’s $191 billion market capitalization. With the deal reported to be all-stock, this would imply substantial shareholder dilution.

Furthermore, Marvell would be paying this huge sum for a company that generated adjusted operating income of just $536.2 million over the last 12 months. However, Lumentum’s revenue also rose by 109% last quarter, demonstrating the strong momentum in optical networking demand.

With this deal, Marvell would be making a huge bet on the future of optical networking, which companies and analysts see as having massive potential. Still, it is difficult to ignore the deal’s sheer scale and valuation risk. If the deal materializes, it will be critical to understand how Marvell plans to make the Lumentum purchase accretive to its long-term earnings growth.

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