Network equipment is transitioning from traditional 800G to 1.6T speeds, with optical interconnect becoming a critical evolutionary direction for enhancing the upper limits of AI computing power. Future technological advancements are expected to increase the value contribution of optical communications within the AI industry, with high-performance product prices likely to rise steadily, thereby elevating the importance of the optical communications segment in the AI computing chain.
Lumentum (LITE.US) projected at OFC 2026 that the optical communications market will continue to expand rapidly. By 2030, the total addressable market (TAM) for AI optical communications—encompassing pluggable optical modules, co-packaged optics (CPO), and optical circuit switches (OCS)—is forecast to surge to $90 billion from $18 billion in 2025.
Key viewpoints are outlined as follows:
Optical communication technology is undergoing revolutionary upgrades. As network equipment advances from 800G to 1.6T speeds, traditional copper interconnects have reached physical limitations in bandwidth, power consumption, and effective transmission distance at data rates of 100G/200G per channel. Optical interconnect has thus emerged as a vital direction for pushing the boundaries of AI computational performance.
To address the extreme cooling and energy consumption demands of AI clusters, the industry is exploring the use of optical circuit switches (OCS) for dynamic routing in the optical domain, as well as CPO technology that integrates optical engines directly with computing chips. These technologies are gradually maturing.
Future technological evolution is set to enhance the value of optical communications in the AI industry. First, continuous improvements in single-card performance of AI chips impose high demands on interconnect communication, leading to a doubling in the number of optical chips and components required per computing chip in future optical solutions. Second, higher performance requirements for optical chips and components will drive up the unit prices of high-performance products, increasing the value of the optical communications segment in the AI computing chain.
Lumentum estimates that the optical communications market will maintain rapid expansion, with a projected compound annual growth rate (CAGR) of 40%.
As a leading supplier of cutting-edge optical communication products for AI data centers, Lumentum holds a competitive edge in lasers such as EML. The company is one of the few manufacturers capable of reliable, large-scale commercial delivery of 200G EML (electro-absorption modulated laser) components, which are critical for 1.6T optical modules. Additionally, Lumentum has accumulated over $400 million in OCS backlog orders, primarily from three hyperscale customers. Its development of ultra-high-power (UHP) lasers for CPO applications is expected to provide a leading advantage in the CPO era.
The company anticipates that after ramping up production at a new factory in 2028, quarterly revenue will increase from the current $665 million to $2 billion (annualized $8 billion), with operating margins potentially rising to 40%.
In March 2026, NVIDIA made a $2 billion strategic investment in Lumentum, accompanied by capacity purchase commitments worth several billion dollars. This investment supports Lumentum's upgrade of a newly acquired North Carolina wafer fab into an advanced 6-inch indium phosphide (InP) production line, expected to begin mass production in 2028 and support annualized capacity of $5 billion.
Key companies highlighted include Broadcom (AVGO.US), Lumentum (LITE.US), and Coherent (COHR.US).
Risks noted include uncertainty in downstream demand, ongoing rapid iteration in optical communication technology, and future competitive landscape variability.