LITE260417C930000.US

Citi: US Communication Equipment

Market Overview: InP Supply Constraints

> Persistent Supply Gap: Despite rapid capacity increases, InP supply is expected to remain below demand for the next three years.

> Strategic Importance: InP is a critical bottleneck in the AI infrastructure buildout, as it is the semiconductor substrate used for high-speed laser diodes in 800G and 1.6T optical transceivers.

> Supply-Demand Model: Citi projects a significant demand gap for EML lasers, estimated at 30% in 2026, narrowing to 20% in 2027 and 11% in 2028.

> 6-Inch Wafer Transition: The transition to 6-inch wafers is a major structural lever, as one 6-inch wafer produces 4.36x more chips than a 3-inch wafer.

Lumentum (LITE) Highlights

> Pricing Power: LITE is identified as the leader in 100G/200G EML and UHP lasers, positioning it to benefit from favorable pricing dynamics.

> Earnings Catalyst: Citi has opened a 90-day upside Catalyst Watch on LITE ahead of its Jun-Q earnings report and ECOC in September 2026.

> CPO Roadmap: Management maintains that Lumentum's Co-Packaged Optics (CPO) roadmap is on track, with laser shipments expected to inflect in Q4 2026 and grow further in 2027.

> Financial Revisions: Citi upwardly revised its FY2027E and FY2028E EPS estimates for LITE by 6% and 5%, respectively, reflecting an anticipated 15% price increase in FY2027E.

Coherent (COHR) Highlights

> Vertical Integration: Coherent is pursuing a strategy of full vertical integration, including growing its own InP substrates and fabricating EML/DFB laser chips in-house.

> 6-Inch Platform: COHR has begun volume production on a 6-inch InP wafer platform and expects to double its InP capacity by the end of calendar 2026.

> Constructive Outlook: Citi remains constructive on COHR, viewing recent stock pullbacks as an attractive buying opportunity given the company's role in the AI optics supply chain.

Competitive Landscape

> Chinese Competition: While domestic Chinese players are scaling up capacity, they are still trailing in qualification cycles and volume/yield stability compared to leaders like Lumentum.

> Export Controls: China's February 2025 decision to add InP to its export-control list caused a supply shock and remains a "tail risk" for the industry.

$AXT(AXTI.US) $Coherent Corp.(COHR.US) $Lumentum(LITE.US)

Morgan Stanley: Optical vs Copper

How do you think about the optical scale up opportunity in 2027, 2028, 2029, etc, and how does that relates to the Nvidia ecosystem and roadmap?

A: We believe a small scale out adoption next year, with small volumes accounting for 10-15% penetration with scale out. We do think there are some low adoption with CPO until Feynman in 2029. Small, single digit adoption of CPO in 2028 and really scaling in 2029.

You took your TAM to $73B, 4x from a year ago, talk about the drivers of that and how that compares to consensus and buy side out there?

A: Driven by CapEx data points being 2x we were expecting last year, that is one vector of growth. The other is the cluster sizes being discussed are the biggest rivers of scale up network . We have gone from 8 to 72, then from a couple 100s to 1000s in the next couple generations. This acts as a multiplier to scale up multiplier.

Talk about the exposure among Lumentum, Coherent, and Corning. Are there nuances between who is more exposed, less exposed?

A: For CPO within scale out, it is generally positive for Lumentum. Doesn't necessarily changed a whole lot for Corning. With Coherent, they have to balance it out with transceiver business they have. For Lumentum it is the most positive because of the one customer they have on the transceiver side being google and they are not going to be adopting CPO. For CPO within scale up, it is opportunity for all 3. This is where copper gets replaced with fiber and lit up by lasers and optical engines made by Coherent an Lumentum. In terms of overall exposure, Lumentum has a bigger catalyst because of larger AI/DC revenue. It would be incremental for both Coherent and lumentum. Lumentum #1, Coherent or Corning #2.

Tell me about the Corning Glass Bridge announcement that got the stock excited?

A: This is not a new announcement. It was a paper they released in 2025 and a presentation they did that refocused the market on this technology. It is already part of the $10B photonics target the company discussed couple of months ago.

In terms of catalyst for optical space, OCP (Open Compute Project) coming in October has gone popular. What are you expecting to hear from this?

A: We think this will be a catalyst because it provides more exposure into hyperscaler behavior. OCP will give us a chance to see hyperscalers roadmap, it will focus on CPO, NPO adoption and the vendors involved.

Copper is still the story for 2026 and 2027. We have seen this continued enthusiasm for ASICs. How is copper well positioned for this dynamic? Who are the well positioned beneficiaries?

A: Copper life can be extended with use of retimers and better SerDes. Copper has a lot of runway before switching to optics. We will likely see a hybrid environment before going to 100% optics. A large debate in scale up is what fabric and protocol will become dominant other than NVLINK as we get into new XPUs and alternatives to Nvidia GPUs ramping. A big debate here is between UALink and ethernet. Ethernet is dependent on Broadcom's new ASICs ramping in 2H2027 into 2028, we think Broadcom will have opportunity to bundle XPU solutions with networking portfolio and are very well positioned in ethernet. On UALink, this is high optionality for Marvell and Astera Labs. Astera has the scale up switch for Trainium 3, this is a PCIe based solution. We think customers will want to move to UA Link eventually.

You consider Keysight as an agnostic winner in R&D, regardless of the copper vs optical timeline. Explain your thesis and why do you see it pulling ahead?

A: Keysight really ways in multiple ways when it comes to AI. First, it benefits from different types of architectures being discussed which all need to be tested with their equipment in labs. Second, when you move to higher speeds (400g laser vs 200g), it requires more complicated testing. Third, when architectures change frequently, like every 2 years, that boosts their business. The variety of architectures being tested matters.

$Astera Labs(ALAB.US) $NVIDIA(NVDA.US) $Broadcom(AVGO.US) $Marvell Tech(MRVL.US) $Credo Tech(CRDO.US) $Semtech(SMTC.US) $Amphenol(APH.US) $Keysight Tech(KEYS.US) $Coherent Corp.(COHR.US) $Lumentum(LITE.US) $Corning(GLW.US) $Alphabet(GOOGL.US)

Rosenblatt: Optical

Context Behind Recent Sector Weakness

> China InP Capacity Scare: Stocks traded poorly over the last 1–2 months due to fears that expanding indium phosphide (InP) capacity in China could crash laser pricing.

> CPO Timing Rumors: Reports suggested a potential one-year delay for large-scale Co-Packaged Optics (CPO) deployment compared to the base expectation of a 2H27 build and 2028 shipment.

> Short Seller Dynamics: Checks indicate short sellers are exploiting this mid-quarter noise without genuine conviction. Many plan to cover their positions before 2QCY26 earnings roll out in late July/early August and intend to go long on Optical stocks by 2027 to capture the 2028–2030 CPO ramp.

Assessing the China InP Threat

> Supply vs. Demand: Chinese players could add 20% to 40% to Rosenblatt's 2030 non-China InP laser capacity forecast of ~$26bn. However, total 2030 InP capacity is still projected to fall 40% behind aggregate demand, mitigating oversupply risks.

> Technological Moat: Near-term Western pricing remains secure because Chinese manufacturers currently lack 200G EMLs and high-power CW (continuous wave) lasers required for CPO and Near-Packaged Optics (NPO) applications. They currently possess low-power CWs for SiPo transceivers and 100G EMLs for 800G transceivers.

> Market Decoupling: Long-term Western and Chinese supply chain dynamics are unlikely to be fungible due to political decoupling and the technical shift toward CPO. Western leaders like Lumentum (LITE) and Coherent (COHR) are already fully sold out through 2027 and into 2028, bolstered by major pre-buys from companies like NVIDIA.

Dongshan Precision: Recently greenlit a $1.2bn expansion in Changzhou for InP lasers and 1.6T transceivers after acquiring Source Photonics.

Sanan IC: Pivoting from LEDs to InP, expanding capacity from 2,750 to 6,000 6-inch wafers per month.

HiSense Optoelectronics & Accelink: Also actively growing InP capacity

Architecture & Structural Industry Demands

> CPO Timeline Intact: The smaller-scale CPO timeline (2H26 build, 2027 ship) remains on track, with 2027 production estimates ranging from 30K to over 350K units each for NVIDIA and Broadcom. 2028 remains the definitive volume inflection year for large-scale CPO, with NPO filling the intermediate gap in 2027.

> Network Flattening Already Priced In: Concerns that technologies like Multipath Reliable Connection (MRC) and Resilient Network Graphs (RNG) will hurt demand are overblown. While larger radix Ethernet switches reduce transceivers per switch from 6–7 down to 3–4, exponential XPU volume growth easily offsets the lower ratio.

> Alternative Laser Architectures (GaAs / VCSELs): 200G VCSELs (made from Gallium Arsenide rather than InP) are emerging as intermediate NPO solutions. Broadcom is looking at them for 3.2T NPO platforms, while Lumentum and startup PicoJool have demonstrated VCSEL-based solutions to circumvent potential InP supply constraints in GPU-to-GPU interconnects.

Key Company Earnings Setups

> Lumentum ($Lumentum(LITE.US)): Toughest near-term setup because it has provided the most forward guidance, though it remains highly attractive at ~$700. Investors are watching if it can accelerate its CY27 target of $2bn in quarterly revenue with 40+% operating margins.

> Coherent ($Coherent Corp.(COHR.US)): Highly favored due to accelerating internal 200G EML/CW laser production and a major new ~$1bn/year 1.6T transceiver contract win with Google (sourcing Mitsubishi lasers). Long-term margins will be supported by 11-figure LTAs with NVIDIA for 2027–2030.

> Applied Optoelectronics ($Applied Optoelectronics(AAOI.US)): Expected to deliver a "beat and raise" watershed 2Q26. Driven by 800G sales to Amazon and Oracle, revenues are expected to exceed $200mn in 2Q26, with 3Q26 guidance pointing to ~$300mn and gross margin expansion well north of the ~30% level seen in 1H26.

> Arista Networks ($Arista Networks(ANET.US)): Positioned for strong growth via massive deployment wins with Meta, Microsoft, Oracle, OpenAI/Anthropic, and Google (which could become a 10% customer in 2026). High deferred revenue recognition is expected to fuel >30% revenue growth in 2H26 and 40+% in 2027.

> Fabrinet ($Fabrinet(FN.US)): Positioned for solid sequential Datacom growth with NVIDIA alongside initial revenue contributions from new Datacom customers Amazon and Lumentum.

> Viavi Solutions ($Viavi Solutions(VIAV.US)): Safe from InP noise as it has no direct exposure. Growth is driven by testing systems (transceiver/OCS) and MilAero products, with CPO/NPO testing revenues slated to begin this fall.

> Ciena ($Ciena(CIEN.US)): Ciena's order book suggest that Data Center Interconnect (DCI) and scale-out orders are poised to reaccelerate from previous levels.

Goldman Sachs had released a supply/demand heatmap and price trends for major sub-segments/products. To provide an overview, here are some key names at each layer:

DRAM

SK Hynix $000660.KS

Micron $Micron Tech(MU.US)

CXMT

Nanya Technology $2408.TW

Samsung Electronics $005930.KS

NAND

SK Hynix $000660.KS

Micron $Micron Tech(MU.US)

Samsung Electronics $005930.KS

Sandisk $Sandisk(SNDK.US)

Kioxia $285A.T

Western Digital $Western Digital(WDC.US)

YMTC

Nearline HDD

Seagate $Seagate Tech(STX.US)

Toshiba

Western Digital $Western Digital(WDC.US)

Foundry - TSMC & Local China

SMIC $0981.HK

Hua Hong Grace Semiconductor $1347.HK

Taiwan Semiconductor Manufacturing $Taiwan Semiconductor(TSM.US)

Analog Semis - Global & Local China

Infineon Technologies $IFX.DE

Texas Instruments $Texas Instruments(TXN.US)

ON Semiconductor $ON Semiconductor(ON.US)

STMicroelectronics $STMicroelectronics NV(STM.US)

OmniVision Integrated Circuits $603501.SS

StarPower Semiconductor $603290.SS

Nexperia

SPE (Front/Back-End) - Japan & Local China

Tokyo Electron $8035.T

Advantest $6857.T

Lasertec $6920.T

Disco $6146.T

Naura Technology $002371.SZ

Advanced Micro-Fabrication Equipment $688012.SS

Kingsemi $688037.SS

Optics - Cables, Connectors, Devices

Coherent $Coherent Corp.(COHR.US)

Lumentum $Lumentum(LITE.US)

Applied Optoelectronics $Applied Optoelectronics(AAOI.US)

Fabrinet $Fabrinet(FN.US)

Zhongji Innolight $300308.SZ

Eoptolink $300502.SZ

Amphenol $Amphenol(APH.US)

Credo $Credo Tech(CRDO.US)

Semtech $Semtech(SMTC.US)

Macom $Macom Tech(MTSI.US)

TE Connectivity $TE Connectivity(TEL.US)

Corning $Corning(GLW.US)

MLCC

Vishay Intertechnology $Vishay Intertech(VSH.US)

Murata Manufacturing $6981.T

Taiyo Yuden $6937.T

TDK $6762.T

Yageo $2327.TW

ABF Substrate

Unimicron $2302.TW

Shinko Electric $6967.T

Ibiden $4062.T

AT&S $ATS(ATS.US).VI

Nan Ya PCB $8046.TW

PCB/CCL

Victory Giant Technology $300476.SZ

Unimicron $2302.TW

Elite Material $2383.TW

WUS Printed Circuit $2368.TW

Furukawa Electric $5801.T

Taiwan Union Technology $6274.TW

Doosan $000150.KS

Shennan Circuits $002916.SZ

T-Glass

Nittobo $6762.T

InP Substrate

AXT Inc $AXT(AXTI.US)

Sumitomo Electric $5802.T

Tantalum Powder

Advanced Metallurgical Group $Affiliated Managers(AMG.US).AS

Silicon Wafers

Shin-Etsu Chemical $4063.T

SUMCO $3436.T

GlobalWafers $6488.TW

Siltronics AG $WAF.DE

Note: Does not cover all possible names. This is a brief overview.

Just putting it out there:

If everything crashes together from $Nebius(NBIS.US), $Marvell Tech(MRVL.US), $Intel(INTC.US), $Sandisk(SNDK.US), $AMD(AMD.US), $SIVE, $Micron Tech(MU.US), $Lumentum(LITE.US), and others...

Which are all down -4% to -10%+ today so far.

Probably doesn't have anything to do with individual fundamentals.

Indiscriminate selloffs from things like cascading margin liquidations, usually provide compelling opportunities if the underlying improves.

Was a sad few months for $Reddit(RDDT.US). But glad it's finally back above $200.

Reddit was doing:

- $663M revenue w/ 91.5% gross margins

- $204M GAAP net income

- 45%+ fwd Y/Y growth after 69%+ growth.

- Net profit is ~30.7% of revenue

Felt very weird to see a profitable company get dragged down after earnings.

But in hindsight, given the increase hyperscaler capex, the drop felt more like it's more relative opportunity cost more than fundamentals?

Since a lot of inflow poured into $Micron Tech(MU.US) / Sk Hynix that are bottlenecked into 2029. Or with laser bottlenecks like $Lumentum(LITE.US) that last into 2029 as well.

Same thing happens in reverse after selloffs ig, even if fundamentals didn't change.

Been seeing a lot of noise with memory optimization or Chinese players... but don't quite think you sign 16T+ LTAs if memory was getting flooded or not used anytime soon.

Same with optical players... if in earnings, they state anything they make gets bought, I don't quite think a lot of the noise has material effect on their fundamentals.

Regardless, nice to see some recovery with familiar faces like $Robinhood(HOOD.US), $Hims & Hers Health(HIMS.US), and $Reddit(RDDT.US) though.

Always a fun time seeing semi markets crash from Bloomberg report framing once again…

UBS analyst on $Meta Platforms(META.US) report: “this is not new news”.

Regardless:

$Aehr Test(AEHR.US) down -18.3%

$Applied Optoelectronics(AAOI.US) down -17.13%

$SIVERS SEMICONDUCTORS AB(SIVEF.US) down -15.4%

$Sandisk(SNDK.US) down -14.8%

$Teradyne(TER.US) down -13.8%

$Corning(GLW.US) down -11.4%

$Marvell Tech(MRVL.US) down -11.2%

$Lumentum(LITE.US) down -10.2%

$Nebius(NBIS.US) down -7.8%

Getting PTSD from Bloombert’s previous misleading report on AMD/Nvidia global export controls earlier this year that crashed semi stocks.

FYI: Meta doesn’t randomly buy $48B+ worth of neocoud contracts if they overbuilt capacity and can cut capex…

Markets are stupid sometimes.