The wave of AI data center construction continues to drive up demand for optical communications, causing related stocks to surge significantly recently, with valuations breaking through historical ranges across the board.
According to Zhui Feng Trading Desk, Morgan Stanley released a research report on April 20. Following OFC (Optical Fiber Communication Conference), a new wave of investors has continued to pour into the optical communications sector. Buyer strength is still expanding, providing sustained support for stock prices.
Capacity for multiple optical communication companies has been fully sold out for this year, significantly reducing revenue uncertainty, while profit margins have become the most critical indicator for the coming quarters.
The lack of transparency regarding laser capacity expansion makes it difficult to grasp the supply-demand gap. Additionally, attention must be paid to the debate between &#34;narrow and fast&#34; and &#34;wide and slow&#34; architectures. The &#34;wide and slow&#34; solution introduces the possibility of replacing InP lasers with MicroLEDs, which could reshape the long-term supply chain landscape.
Morgan Stanley raised target prices for four major optical communication stocks: Corning was raised from $127 to $140; Lumentum from $595 to $710; Coherent from $250 to $290; Ciena from $286 to $405.
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/02c85ca1-d214-43ba-a9fa-26169f21976c.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/02c85ca1-d214-43ba-a9fa-26169f21976c.png"/>
<h2>Fully Sold-Out Capacity Reshapes Game Logic, Profit Margins Become Core Variable</h2>
Against the backdrop of comprehensive capacity tightness, the investment logic in the optical communications sector has quietly shifted. With capacity locked by multiple companies for most of this year or until 2026, revenue forecasts have become relatively clear, shifting market attention to whether companies can effectively capture upside space in profit margins under a tight supply situation.
On this issue, LITE currently holds the greatest advantage. The company has persistently implemented aggressive price hikes, which is the core reason why its buyer-consensus EPS far exceeds seller-consensus expectations. However, this pricing power may not be replicable across the entire supply chain.
GLW's situation is more complex. Fiber prices in Asia have risen by 75%, reaching a seven-year high, leading investors to anticipate whether GLW will benefit similarly. However, GLW management has taken a conservative stance, stating that &#34;there is sufficient fiber globally to meet demand,&#34; and price improvements will be driven more by product innovation rather than direct spot price hikes.
Two marginal changes also require attention: First, over 30% of BEAD funds (US broadband infrastructure subsidies) will shift towards fixed wireless and satellite directions, likely reducing fiber demand;
Second, after CommScope sold its fiber business to Amphenol, Corning canceled raw material fiber orders with CommScope, triggering a chain reaction of order cancellations and slightly tightening the fiber market.
<h2>Laser Capacity Expansion Progress Remains Opaque, Supply Rhythm Becomes Key Unknown</h2>
Indium Phosphide (InP) lasers are the core components for current AI optical interconnects. Their capacity dynamics directly affect the supply-demand landscape of the entire supply chain and remain one of the most watched topics by investors.
Based on publicly available information:
<blockquote>
LITE plans to expand EML capacity by over 50% in fiscal year 2026;
COHR plans to double capacity in fiscal year 2026 and increase it by over 100% in fiscal year 2027;
Sumitomo Electric has planned to double capacity from 2024 to 2026, followed by a further 40% increase from 2026 to 2028;
Broadcom stated it will expand capacity by 4 to 6 times within the next year.
</blockquote>
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/e403f452-5771-4898-a388-c6df37ab1e5f.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/e403f452-5771-4898-a388-c6df37ab1e5f.png"/>
However, several key variables remain unclear.
First, there is controversy regarding the allocation ratio between EML and CW lasers in 1.6T demand—LITE predicts CW will account for about 30% to 40%, while Sumitomo believes it will exceed 50%.
Second, many manufacturers are switching to 6-inch wafers, leaving significant uncertainty regarding yield rates. Additionally, specific details of Broadcom's capacity expansion remain undefined.
Due to the lack of reliable market share data and only LITE disclosing detailed capacity expansion information, the precision of the overall supply-demand model faces obvious limitations. Whether the timing of supply expansion can match the growth rhythm of AI demand will be a critical variable influencing sector sentiment.
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/e0994c8a-630b-4e95-b9e9-7e38f1e93526.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/e0994c8a-630b-4e95-b9e9-7e38f1e93526.png"/>
<h2>Debate Between &#34;Narrow and Fast&#34; and &#34;Wide and Slow&#34; Architectures May Reshape Long-Term Supply Chain Landscape</h2>
In the field of CPO (Co-Packaged Optics), the debate between &#34;Narrow and Fast&#34; and &#34;Wide and Slow&#34; architectural routes has become an increasingly important long-cycle topic for investors.
The &#34;Narrow and Fast&#34; solution achieves higher per-channel rates with fewer channels. A typical configuration is 1.6T = 8 channels × 200G, optimizing bandwidth density and power efficiency, representing the mainstream trend direction for current AI cluster construction.
The &#34;Wide and Slow&#34; solution achieves the same total bandwidth with more channels but lower per-channel rates. A typical configuration is 1.6T = 16 channels × 100G, relying on a more mature ecosystem but consuming more space and core resources.
The strategic significance of the &#34;Wide and Slow&#34; solution lies in introducing the possibility of replacing InP lasers with MicroLEDs.
Microsoft's MOSAIC architecture is a representative of this direction—carrying numerous low-speed parallel optical channels through imaging fibers (containing thousands of cores), potentially reducing reliance on InP lasers in certain scenarios. COHR argues that VCSEL technology also possesses competitiveness within the &#34;Wide and Slow&#34; architecture.
This route debate is expected to take several years to clarify but has already begun to impact the long-term positioning of COHR and LITE—if the &#34;Wide and Slow&#34; route accelerates penetration, suppliers currently centered around InP lasers as their core competency may face greater long-term challenges, while companies related to MicroLEDs stand to benefit.
<h2>Valuations Break Historical Ranges, &#34;Bullish Assumption&#34; Lacks Falsification Catalyst</h2>
Current valuations for optical communication stocks have completely broken away from historical mean ranges, becoming another core point of contention.
Major targets such as CIEN, LITE, COHR, and GLW are currently trading at 20 to 25 times their 2028 expected EPS, while their 10-year average P/E ratios mostly hover around 17 to 19 times. CIEN and LITE current valuations are approximately three times their respective five-year historical averages.
In contrast, storage and hard drive companies (such as MU) still trade at single-digit to low double-digit P/E ratios. This significant divergence has triggered frequent investor inquiries regarding the rationality of optical communication valuations.
The rationale for the premium comes from the following points:
<blockquote>
First, application scenarios for optical communications continue to expand (CPO, Optical Circuit Switching OCS, coherent transmission, etc.), offering clearer growth potential;
Second, there is a significant gap between buyer-consensus EPS and seller-consensus expectations, and most catalysts (such as new product volume ramp-up and price hike effects) will not materialize until 2027 to 2028;
Third, unlike storage, optical communications currently lacks recent data points that could falsify the bullish assumption, while sustained strong AI capital expenditure continues to provide further support for valuations.
</blockquote>
However, current valuations are historically on the higher side. If market conditions see profit margins falling short of expectations, significant capacity expansion by Broadcom lasers bringing supply-demand rebalancing, or worsening competition in the OCS landscape, valuations face the risk of reverting to the high teens range.
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/449a2c52-16de-4c86-b352-8af78650fe75.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/449a2c52-16de-4c86-b352-8af78650fe75.png"/>

159695

515880

159507

Multiple optical communication companies have sold out their capacity for this year. Morgan Stanley points out that with high revenue visibility, market focus has shifted from "whether demand is strong" to "whether profit margins can improve." Currently, the overall expansion progress of lasers remains unclear, making it difficult to gauge the supply-demand gap; on a technical level, there is a debate between "narrow and fast" and "wide and slow" architectures. The "wide and slow" approach introduces the possibility of replacing InP lasers with MicroLEDs, potentially reshaping the supply chain landscape

Wallstreetcn

Harvest CNI Communication ETF

Guotai CSI All Share Communications Equipment ETF

GF Fund CNI Communication ETF

Morgan Stanley

Corning

Lumentum

Coherent Corp.

Ciena

Commscope

Amphenol

Sumitomo Electric Industries, Ltd.

Broadcom

Microsoft

MORGAN STANLEY DEP SHS EA REP 1/1000 SHS NON CUM PFD O

MORGAN STANLEY DEP SHS REPSTG 1/1000TH PFD SER Q

MORGAN STANLEY DEP SHS REPS 1/1000 7.125% PFD E

MORGAN STANLEY NON-CUM DEP SH REP 1/1000 PFD SER I

MORGAN STANLEY 4.875 DEP SHS REP 1/1000 NCUM PFD SR L

MORGAN STANLEY 6.5%DEP SHS REPSTG 1/1000 NON CUM SER P

MORGAN STANLEY DEP SHS REPS 1/1000 PFD SER 'A'

MORGAN STANLEY DEP SHS REPR 1/1000TH INT PFD SER 'F' FX

MORGAN STANLEY DEP SHS REP 1/1000 NON-CUM PFD STK SER K

Optical Communication Capacity Fully Sold Out: Where Are the Current Stakes?