The battle between light and copper intensifies; where does the expectation gap lie?

Optical interconnect company’s stock price has increased over 50% year-to-date, while copper connector stocks have experienced significant sell-offs. This valuation gap is becoming the most关注的 structural contradiction among investors at the upcoming OFC (Optical Fiber Communication Conference).

According to JPMorgan’s latest research report, NVIDIA will emphasize at the conference the critical role of optical scaling in enhancing computing system performance, further boosting confidence among optical suppliers regarding demand visibility.

Meanwhile, the market forecast for Optical Circuit Switching (OCS) has been significantly upgraded, and products on the telecom side are also expected to return to high-growth tracks amid accelerating data center interconnect (DCI) demand.

However, JPMorgan also points out that the stark valuation gap between optical communication stocks and copper connector stocks has led to increasingly “harsh” market pessimism on copper connector companies, making their potential for reversal after OFC more prominent. APH has fallen 2% since the beginning of the year, TEL down 8%, and CRDO down 28%.

Optical industry continues to strengthen, CPO shifts from bear to bull

The bearish argument that once troubled the optical transceiver market last year has quickly faded. JPMorgan’s report shows that the growth of transceiver business has synchronized with the accelerating orders for Co-packaged Optics (CPO), jointly dispelling previous pessimism. The stocks covered in the optical sector have gained an average of over 50% this year.

Regarding CPO, the market narrative has transitioned from bearish to neutral and then bullish. Early concerns that CPO adoption would compress transceiver revenues have been disproven—incremental revenue opportunities from CPO are adding to growth expectations for related companies rather than replacing existing revenue.

Industry analysts forecast that the CPO market size will grow from less than $500 million in 2027 to about $10 billion by 2030, with expansion driven mainly by scale-up applications rather than scale-out.

Investor focus has also shifted: after confirming that optical companies as a whole benefit from CPO, the next key issue is the differentiation between CPO winners and losers. JPMorgan believes that Coherent and Lumentum, leveraging existing orders and NVIDIA’s supply chain investments, have firmly established their leadership in CPO.

OCS market exceeds expectations, overestimated threats to copper connector companies

OCS is another rapidly emerging opportunity. According to JPMorgan, the 2030 market size forecast for OCS has been raised from $1-2 billion a year ago to over $4 billion, compared to less than $500 million in the previous year.

Among the beneficiaries in the OCS supply chain, JPMorgan expects Coherent and Lumentum to be the main winners, with Celestica also benefiting. Currently, the differentiation among suppliers is limited, as customers prefer to engage multiple suppliers to handle rapid volume increases.

Concerns about copper connector companies are considered significantly overestimated by JPMorgan. The firm expects that the scale-up applications of optical/CPO will mainly be concentrated in rack-to-rack deployments before the end of this decade, with slower replacement within racks. Additionally, adoption of CPO in non-NVIDIA computing platforms remains very limited.

JPMorgan emphasizes that after OFC, the fundamental trajectory of copper connector companies “performing better than pessimistic expectations” may be a stronger driver for stock prices than the re-strengthening of optical fundamentals.

Lumentum: Long-term financial targets expected to be significantly revised upward

Lumentum is one of the most watched companies at this year’s OFC. JPMorgan expects that management will announce a substantial revision of long-term targets during the investor briefing.

JPMorgan projects that Lumentum will raise its 2030 market forecast to approximately $60 billion (about +35% CAGR), covering data communications (~$45 billion), telecom (~$10 billion), and OCS (~$5 billion), a significant increase from the previous forecast of around $30 billion by 2029.

Regarding financial goals, Lumentum’s previous quarterly revenue target was about $750 million, but its F3Q26 guidance (ending March) is already close to $800 million, ahead of schedule.

Based on JPMorgan’s expectations, the company will set a mid-term goal to double revenue within the next 12-18 months, with quarterly revenues potentially reaching around $1.6 billion. The incremental contributions to this doubling are expected to come from approximately 35% from OCS, 25% from CPO, and the rest from data communication chips and transceivers.

Looking further ahead, driven by continued volume growth in CPO and data communication chips, quarterly revenue could surpass $2 billion, with gross margins approaching 50%, operating margins near 40%, and earnings per share in the range of $25 to $30.

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