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Notes on $Lumentum(LITE.US) ahead of earnings tomorrow.

On the Q3 call (May), the CEO put the demand/supply imbalance at “somewhere greater than 30%” and said the company is “having to make choices across the company” to service demand, noting that significant customers are looking to up their orders that “we simply can't service”.

Then on pricing, the CFO said “prices are holding or they're increasing for what customers want”.

When you combine supply constraints with relative pricing power, you get a pretty powerful company...

Ultimately, Lumentum can't be competed away and forced out of the market mainly because of their 200G EML volume production. Mitsubishi, Sumitomo, Furukawa and $Coherent Corp.(COHR.US) can all do 100G, but no one can do 200G like Lumentum, and at their volumes since they're the only supplier shipping 200G EMLs in volume today.

On capacity, Lumentum's EML output is up ~8x since FY23 and management guided to roughly 50% more InP output and more than 50% EML unit growth from the December quarter last year to the December quarter this year. All while the demand/supply gap has extended. Their fabs are clearly straining, with the Japan wafer fab already “fully allocated”.

And the new Greensboro InP fab won't come online until 2028 mainly because of reactor installs and cleanroom work. Even then, any incremental output would still need to pass customer qualifications before hitting the topline, so it's still some time before seeing any sort of material benefits.

Honestly, my first instinct on any “sold out for years” claim is skepticism, however with Lumentum, their output went up ~8x and the demand gap still got wider.

That's pretty insane, and is why the stock trades at relatively lofty valuations today. YTD, a ton of pricing-in has already happened, but I do see continual growth vectors incoming:

Looking at industry numbers, 800G+ goes from ~20% of transceiver shipments in 2024 to over 60% in 2026, and EML/CW laser capacity roughly doubles this year to ~50M units a month (TrendForce puts the 2026 figure at 50.7M). Yet lasers are still a bottleneck, so if supply doubles and the shortage doesn't close, the demand curve only steepens.

- For context, TrendForce has the top three EML makers (Lumentum, $Broadcom(AVGO.US), Mitsubishi) holding ~72% of the market between them, and only Lumentum ships 200G in volume.

With CPO, $Lumentum(LITE.US) is the named laser supplier on $NVIDIA(NVDA.US) Spectrum-X/Quantum-X photonics switches (Nvidia has signaled it wants more than one laser source over time, but Lumentum is the one in the design today). The “CPO kills the optics suppliers” bear case has always struck me as an argument made by people who haven't looked at where the light actually comes from: the transition moves the laser into an external module and makes it more important…not less.

Personally, I estimate hundreds of CW lasers per 512-port switch. Lumentum already has a multi hundred million $ CPO/ELS PO on the books which gets delivered in H1'27. You can link this to $SIVE because their InP lasers going onto $GlobalFoundries(GFS.US) SiPh platform proves that SiPh still needs an InP light source, regardless of whichever packaging approach dominates at the end of the day.

There's also a vertical integration story to Lumentum that mirrors $Applied Optoelectronics(AAOI.US)'s but it runs in the opposite direction. $Applied Optoelectronics(AAOI.US) is a module maker that built its own laser fab; $Lumentum(LITE.US) is a laser maker that bought a module business (Cloud Light) and is closing the loop since its own CW lasers are set to go into ~20% of its own transceivers this quarter, and 200G EML revenue more than doubled sequentially last quarter.

So in a laser-short world, the module makers who own their laser supply actually ship, and the ones who don't just sit on their hands. Both $Lumentum(LITE.US) and $Applied Optoelectronics(AAOI.US) worked out the same thing from opposite ends, and the fact that a module maker and a laser maker independently converged on full stack integration should tell you where the bottleneck is…

Just touching on the proposed FCC China transceiver ban again. This would actually cut both ways for $Lumentum(LITE.US). Cloud Light builds in Thailand and benefits directly from that shift. On the flip side, Chinese vendors make roughly 60% of datacom optical component revenue, with InnoLight and Eoptolink taking around 60% of the high-end 800G+ orders — and $Lumentum(LITE.US) sells EMLs to them.

The problem is that $Lumentum(LITE.US) reports revenue by shipping destination, not end customer: China plus Hong Kong was ~25.5% of last quarter's revenue.

That figure overstates true China exposure, because much of it is chips delivered to contract manufacturers building for US hyperscalers, but it also hides how much of the EML business depends on Chinese module makers specifically.

Honestly, nobody outside the company knows the real split. But if Chinese customers' orders fall before Western module makers scale up to replace them, Components revenue could dip for a quarter or two, and it's quite hard to forecast accurately ahead of any earnings releases. (Assuming the ban actually goes ahead).

Even so, I think the ban would be a net positive because it just changes who assembles modules rather than impacting the demand side. Chinese module makers switching to domestic EML suppliers would still face a multi year qualification cycle at 200G that they can't shortcut. Upstream, China's export controls on InP substrates have pushed 6-inch wafer prices up ~250% (roughly $1,400 to $5,000 since February 2025), all while $Lumentum(LITE.US) locked their own substrate supply a couple weeks ago with a capacity reservation at $AXT(AXTI.US) running through to 2031, ahead of anything peers have signed.

Obviously, that supply still sits inside China's export permit regime (AXT ships from China and says it can't predict permit timing) but in my view, Lumentum being first in line is worth more than the risk it carries.

For a TLDR on key watchpoints from the Lumentum earnings call:

- 200G EML trajectory within datacom lasers (it more than doubled sequentially last quarter) and the overall EML unit ramp.

- ELS volumes and any second 1.6T Cloud Light customer.

- Greensboro InP timeline and whether first output slips or gets pulled forward.

After the July selloff, it does seem like a lot of froth has come out ahead of this ER compared to a couple of weeks ago.

Disclosure — I have a position in $Lumentum(LITE.US).

Now that markets are hosting a laser party again from $SIVE, OE Solutions, $Lumentum(LITE.US), Coherent, to $Applied Optoelectronics(AAOI.US).

There’s a pretty interesting study:

Both from Fidelity and a UC Berkeley research paper, that the best investors are the ones who either…

- Anecdotally forgot about their account (Fidelity)

- Didn’t actively trade/overtrade (18.5% return from infrequent traders vs. 11.4%).

Not any advice, but some of these anecdotes might be helpful to retail to read in general…

Since I witnessed a lot capitulation off memory, photonics, or thematic volatility, just for retail not have positions on a sharp recovery.

Having conviction also usually people in that “not overtrading” camp, since it helps to not overtrade in drops or see opportunities to cost average.

Recommended reading for the weekend:

1. Aswath Damodaran (@AswathDamodaran) — Information Timing and Release: The Gaming of Guidance!

2. Dwarkesh Patel (@dwarkesh_sp) — Why compute might get 10x+ more expensive in coming years

3. J.P. Morgan — Semiquincententacles

4. @citrini — Protection Matters: Cybersecurity’s Winners and Losers

5. Neil Shah (@neil_shah) — Innolight, Coherent, Lumentum: Who Wins and Loses in the Proposed FCC Ban on Chinese Transceivers?

Just some TLDR notes on $Applied Optoelectronics(AAOI.US) earnings:

- Expects full qualification of 1.6T products by their hyperscaler customer within next couple of weeks

(helpful revenue ramp #2, timelines)

- Continues to believe that AOI will have the largest AI DC transceiver production capacity in the US

(reiterating ambitions during a time when their competitors might get banned)

- Expects facilities toward InP capacity to come online in early 2027

(timeline FYI in terms of further ramp)

- Total capacity is approaching 200,000/u per month, EOY 650,000/u per month of 800g/1.6t. EOY 2027, 930,000/u

(this is the ramp i want to see)

- "increase our manufacturing capacity for our external light source or ELSFP. That's for co-packaged optics or CPO". we anticipate ramping production later this year and into 2027, ultimately culminating in about 400,000 pieces per month in 2028

(need some time to model this into revenue)

- "As we have mentioned before, we've been manufacturing lasers internally for many years. This has allowed us to avoid some of the shortages that have affected others in the industry"

(vertical integration bull case during CW/EML laser shortages)

- We believe that in the future, CPO will continue to drive increased demand for high-power lasers

(thesis validation on CPO sector)

- "to our long-term objective of returning non-GAAP gross margins to around 40%"

- "We ended the second quarter with $508.8 million in total cash equivalents"

I need to double check if the ATM finished or not

- "our ability to deliver revenue in general, and specifically when it comes to 800G products, is limited by our production capacity right now" "If we could produce more, we could ship more right now"

Demand > Supply validation.

- "Most of the increased capacity will be in U.S. Even so, let me say that, like I keep emphasizing, that is not good enough for the customer demand. The customer demand is 20%-40% higher."

Unholy photonics demand validation across the whole sector, read through for $Lumentum(LITE.US), $SIVE / $Jabil(JBL.US), and others is amazing.

- "Not in the next two, three years, especially the demand is so big. Okay? Even combined AI, $Lumentum(LITE.US), $Coherent Corp.(COHR.US), $Broadcom(AVGO.US) all together, it's still very tough to meet the customer demand in the next few years"

More optical sector demand validation.

- CPO Timelines: "If you're talking about really high volume manufacturer [for CPO market], I would say more like the late Q3 next year" and "We have been working very close with at least five customer"

If you care about current earnings (which I'm not really looking at closely)

Revenue: $191M vs. $190m

EPS: $.06 vs. $.02

TLDR: Extraordinary demand across the laser + optical sector read through. Kinda supporting Lumentum CEO statement that laser shortage is worse than memory shortages.

2027 capacity ramp on track. To map inflection period with timelines, would be around early next year, as stated in their previous earnings call.

AAOI has the customers now. Limitation is making enough lasers and transceivers.

Citi: Optical

Core Market Growth

> Market Opportunity: The global optical interconnects market is expected to hit USD 92 billion by 2028 (with a 65% 3-year CAGR), accompanied by an Average Selling Price (ASP) growth of an 18% CAGR.

Optical Chip

> Optical Chip Demand: Total demand is estimated at 1.714 billion units by 2028 (~62% to 63% CAGR from 2025).

> CW Laser Chips: Projected to see explosive growth to 987 million units by 2028 (~114% CAGR).

> EML Chips: Projected to reach 718 million units by 2028 (~34% CAGR).

$Applied Optoelectronics(AAOI.US) $Macom Tech(MTSI.US) $Coherent Corp.(COHR.US) $Lumentum(LITE.US) $Marvell Tech(MRVL.US) $Broadcom(AVGO.US)

A U.S. import ban on new Chinese optical transceivers hurts hyperscalers because Western vendors like $Lumentum(LITE.US), $Coherent Corp.(COHR.US) and $Applied Optoelectronics(AAOI.US) can't scale fast enough.

In reality, I do not see how this ban actually materialises, but it’s a fun thought experiment regardless.

Currently, China is the dominant force in optical transceiver supply. According to Counterpoint Research estimates, Chinese manufacturers such as Innolight and Eoptolink account for “nearly two-thirds of global unit supply and approximately 60% of global optical datacom transceiver revenue”.

For context, Innolight is the largest global incumbent and their optical modules account for ~98% of revenue, with the U.S. accounting for 62% of 2026 revenue. In addition, per industry estimates, Innolight holds over half of Nvidia’s high speed module wallet and the bulk of Google's >800G demand this year. They’re pretty important to the U.S.

For more context on the proposed ban, per Reuters: “the U.S. is working on the measure to bar imports of new Chinese optical transceivers”. “New” is the keyword, meaning that everything already certified i.e. the entire shipping 800G base would keep flowing. Then what gets foreclosed is new authorizations. In practice, that means 1.6T qualification, running right now for 2027 clusters.

So the question is whether U.S. firms like Lumentum, Coherent and Applied Optoelectronics can supply the U.S. 1.6T ramp if China is banned from U.S. optical transceiver exports?

I believe the answer is no, which in turn materially impacts the hyperscalers’ ongoing data center buildout.

1. $Applied Optoelectronics(AAOI.US) is scaling from ~100k modules a month in Q1 toward a targeted 650k+ by the end of 2026 ~930k by end-2027 — targets from a company with a record of ramp slips.

2. $Coherent Corp.(COHR.US) only broke ground on its Sherman doubling in June. In turn, that is an ~18 month construction and qualification timeline. Management's own framing is internal InP output doubling by the end of 2026, not module output step changing now.

3. $Fabrinet(FN.US) is effectively the $NVIDIA(NVDA.US) 1.6T line and they bring a new Chonburi building online around year-end worth ~$3bn of revenue capacity. But $Fabrinet(FN.US)'s own datacom number was held back last quarter by laser and component shortages.

U.S. >800G demand is itself growing violently since 1.6T goes from under 1M units in 2025 to many millions in 2026, with an even steeper 2027 inflection. Replacing a >60% Chinese share of a growing market means that non-China output has to roughly 3x in a couple of years. I do not see how that can happen, even with the ongoing capacity expansions at $Applied Optoelectronics(AAOI.US) and $Coherent Corp.(COHR.US).

Ultimately, the binding constraint is lasers. EMLs and CW sources come from $Lumentum(LITE.US), $Coherent Corp.(COHR.US), Mitsubishi, Sumitomo and $Broadcom(AVGO.US) — a layer that is already non-Chinese. And Nvidia's $4bn March lockup of Lumentum and Coherent capacity pushed everyone else's EML lead times past 2027. Banning Chinese modules removes ~zero lasers from the ecosystem. Innolight's real moat is >90% yield at scale on 1.6T SiPh, so a new Western line starting nearer 70% turns the same EML supply into ~25% fewer “good” modules.

Then when you add up 1.6T test set lead times, alignment automation talent, and 6-12 month qualification cycles per hyperscaler platform on top, the short-term window for the U.S. to “replace” China closes up quickly.

Moreover, Western vendors simply won’t over build right now because of CPO potentiality removing pluggables within a generation or two. The rational strategy would be to harvest pricing and let hyperscaler prepayments fund capex — $Applied Optoelectronics(AAOI.US)'s prepaid hyperscaler order structure is exactly that, and I expect more “warrant and capacity” deals as each hyperscaler races to lock in scarce non-China 1.6T allocation first.

Existing certified 800G would keep flowing because the FCC would know that non-Chinese firms can’t fill the gap right now. Which would mean that Chinese 800G stays throughout 2027, and the likes of $Applied Optoelectronics(AAOI.US), $Lumentum(LITE.US) etc. are for the 1.6T U.S. design-ins.

For China, I don’t think they have a big reason to escalate this further right now and front-run an export ban themselves since Innolight would still freely sell to ByteDance, Alibaba and Tencent…China cares about China, the U.S. cares about the U.S.

*If* this Chinese export ban passes, the real fight would however become private: hyperscalers lobbying if the DC buildout stalls and Chinese vendors restructuring toward exemption to profit maximise. That would split the transceiver supply chain into a premium U.S. price curve and a discounted “everywhere-else” curve.

GF Securities: Optical

> Strong Demand Projections: Total demand for 800G/1.6T is expected to reach 80 million units each in 2027, driven by ramping accelerator demand from Nvidia, Google, AWS, and other ASICs, as well as rising GPU/ASIC scale-out bandwidth and optical module ratios.

> CPO/NPO Adoption Timelines: CPO and NPO are being developed side-by-side in next-gen infrastructure, with CPO acting as the long-term design for lower power and latency, while NPO offers better short-term manufacturability and deployment flexibility starting around 2H27.

> Nvidia Architecture Shifts: Each Rubin GPU is equipped with two CX9 NIC chips (doubling scale-out bandwidth versus Blackwell), and Rubin Ultra is estimated to adopt four CX9 chips per GPU, shifting the 1.6T optical module ratio from 1:2.5 up to 1:5.

> Google's Scale-Up and Scale-Out Transition: Google is expected to fully transition to large-scale clusters in 2026 where the scale-up layer adopts optical interconnects, resulting in an overall TPU-to-optics ratio of approximately 1:4 (1.6T equivalent).

> Supply Chain and Component Value Impacts: NPO shifts signal conditioning to system designs, lifting the value of TIAs and laser drivers to tens of dollars per 3.2T optical engine, benefiting supply chain players like Marvell and SMTC.

$Applied Optoelectronics(AAOI.US) $Marvell Tech(MRVL.US) $Coherent Corp.(COHR.US) $Lumentum(LITE.US) $Alphabet(GOOGL.US) $NVIDIA(NVDA.US)