A recent research report from Huayuan Securities indicates that the ongoing expansion of AI computing infrastructure is fueling rapid growth in demand for high-speed optical interconnect solutions. Core components along the supply chain, including 800G and 1.6T optical modules, as well as upstream optical chips and lasers, are emerging as key beneficiaries. The continued scaling of AI computing clusters, coupled with bandwidth and power consumption constraints, is driving data center interconnect architectures toward high-density optoelectronic integration.
The brokerage believes that the growth in AI optical interconnect demand is pushing core optical components into a phase of tight supply-demand balance. Manufacturers with expansion capabilities, existing capacity reserves, and advantages in customer qualification are likely to gain priority benefits. Consequently, Huayuan Securities has assigned a "Buy" rating to the communications sector.
Strong Overseas Performance Highlights Accelerating AI Demand Transmission to High-Speed Interconnect Links
The expansion of AI infrastructure is driving robust demand for high-speed optical interconnect, with 800G and 1.6T optical modules and upstream core components like optical chips and lasers standing out as primary beneficiaries. Overseas optical communications companies are reporting sustained high growth, with AI demand boosting the prosperity of the high-speed optical module and core optical component sectors. Specifically, Lumentum recorded revenue of $1.006 billion in its fiscal Q4 2026, a 109.3% year-over-year increase, with component business revenue reaching $649 million, up 102.7%, driven by strong demand for high-power CW lasers and EMLs. Coherent saw its data center business grow 59% year-over-year in the same period, with 800G and 1.6T optical transceivers leading the growth. AOI's fiscal Q2 2026 results showed data center revenue up 140.4% year-over-year, with 800G product revenue surging more than tenfold.
AI Infrastructure Upgrades to High-Density Interconnect, Paving the Way for NPO/CPO Adoption
As AI computing clusters expand, bandwidth and power consumption bottlenecks are driving data center interconnects to evolve toward high-density optoelectronic fusion architectures. NVIDIA has introduced products like Spectrum-X Ethernet Photonics based on silicon photonics technology, pushing CPO from technical validation toward industrial application. From an industry path perspective, NPO is likely to serve as a more certain transitional solution in the short term, while CPO represents the long-term evolution direction. During its fiscal Q4 2026 earnings call, Lumentum's CEO confirmed receipt of the company's first purchase order for external laser source (ELS) modules, with deliveries expected in the second half of 2027. The company also anticipates demand for ultra-high-power laser chips to ramp up in the latter half of 2027, preceding customers' large-scale CPO deployments expected in 2028. Coherent noted a significant increase in customer engagement for NPO/CPO projects between its fiscal Q3 and Q4 2026, with nearly all major strategic customers advancing related initiatives. The company's PhotonLink platform, supporting NPO/CPO, is expected to generate initial revenue in its fiscal Q2 2027, with Scale-Up CPO revenue contributions beginning in the second half of 2027.
Core Optical Component Supply Tightens, Manufacturers Secure Orders to Drive Industry Expansion
As NPO/CPO gradually enters the industry introduction phase, the supply chain bottleneck is shifting from traditional optical module manufacturing to upstream core optical components, with high-power CW lasers, InP chips, and optical engines likely becoming critical links. In its fiscal Q4 2026 communications, Lumentum stated that AI data center demand remains strong, keeping the high-power laser supply-demand situation tight. The company holds a 70%-80% market share in pump lasers and is actively advancing expansion plans for two indium phosphide wafer fabs in Japan, alongside the ongoing conversion of its Greensboro, USA facility from gallium arsenide to indium phosphide. Coherent continues to expand its 6-inch InP production lines in Texas and Sweden, with InP laser output growing approximately 80% year-over-year in its fiscal Q4 2026. The company expects its internal InP production capacity to double year-over-year by the end of fiscal Q4 2026, one quarter ahead of schedule, with plans to more than double this capacity again by the end of 2027.
Huayuan Securities concludes that the growth in AI optical interconnect demand is driving core optical components into a phase of tight supply-demand equilibrium. Companies with expansion capabilities, capacity reserves, and customer validation advantages are best positioned to benefit first, supporting the firm's "Buy" rating on the communications sector. Recommended stocks to watch include: Optical Modules - Zhongji Innolight, Eoptolink Technology, Dongshan Precision Manufacturing, Accelink Technologies; Optical Components - TFC Communication, Yuanjie Semiconductor, T&S Communications, Optowide Technologies, Changguang Huaxin; Connectors - Dingtong Precision, Recodeal, Hongrida.
Risks include lower-than-expected capital expenditure from overseas cloud providers, global economic volatility, and fluctuations in upstream raw material prices.