To The Moon

Optics Is Now AI's Next Bottleneck: LITE vs. COHR—A Full, Side-by-Side Showdown

NVIDIA spent $4 billion yesterday to take stakes in two leading optical-communications players—an effort to pre-book critical upstream capacity for the next-generation AI compute architecture era of “optical interconnect.” 

After the announcement, both stocks kept climbing at elevated levels, jumping more than 10%, suggesting the market is repricing “upstream component tightness + long-term volume lock-in.”

Securing Lasers, InP, and U.S. Onshore Capacity

What NVIDIA is betting on isn't the largest (and lower-barrier) part of today's optics market—optical modules—but rather more upstream, more critical, and geopolitically lower-risk U.S.-based optical source and component capacity, with a focus on lasers and InP (indium phosphide).

– For $COHERENT(COHR)$   : the $2 billion is expected to go primarily toward capex, especially expanding InP capacity at its Sherman, Texas facility. Meanwhile, the “multi-billion-dollar” purchase commitment is slated to begin in early 2027 and run through 2030.

– For  $Lumentum(LITE)$    : the funding is mainly intended to build a “brand-new” wafer fab in the U.S. The company previously disclosed a “hundreds of millions of dollars” purchase order expected to land in 1H 2027; NVIDIA’s new purchasing + investment package is more of an incremental swing factor, with incremental revenue expected to start showing up gradually from 2H 2027.

Head-to-Head: Two Leaders, Different Strengths

Lumentum is currently one of NVIDIA's key suppliers for CW lasers and EML laser chips used in both CPO and pluggable optical modules. Its most differentiated edge is leadership in high-speed lasers. Flagship products include 100G-per-lane EML (electro-absorption modulated laser) for 800G modules, and it is accelerating volume ramp for 200G-per-lane EML targeting 1.6Tb/s modules. Today, Lumentum's InP laser chips are essentially sold out—and even with ongoing expansion, demand still materially exceeds supply.

Coherent is also a supplier to NVIDIA for CW lasers, ELSFP modules, and 800G/1.6T optical modules. Coherent traces back to legacy optical-communications player II-VI, which acquired Finisar and Coherent Inc., then merged and rebranded. Versus Lumentum, Coherent's portfolio is broader (lasers, devices, components, etc.), but acquisition-related debt previously kept the stock range-bound for a long time. As AI capex momentum continues, Coherent's industrialization capability and customer penetration in optical comms are showing up more clearly.

1) Financial Performance: Lumentum's Growth Looks Faster

On absolute scale, Coherent's datacom business is meaningfully larger than Lumentum's. Using its latest disclosed FY26 Q2 as an example: Coherent posted roughly $1.6 billion of quarterly revenue, with about $1.2 billion tied to data center / communications and roughly $0.4–0.5 billion tied to industrial. Lumentum, by contrast, reported about $630 million of total revenue for the quarter. On a comparable basis, Coherent's optical-network-related business is roughly ~2x Lumentum's.

But in terms of earnings leverage, Lumentum's improvement has been steeper: driven by high-speed laser mix, its gross margin has climbed quickly over the past two years (from 32% in FY25 Q2 to 42% in FY26 Q2), accelerating the pace of net-profit improvement. Coherent, meanwhile, saw gross margin edge up more modestly over the same period (from 38% in FY25 Q2 to 39% in FY26 Q2).

2) Positioning for New TAM: Lumentum Looks Better Right Now

Morgan Stanley has argued that as AI data-center bandwidth keeps moving higher—and as traditional approaches hit bottlenecks (copper reach limits, per-lane/laser speed constraints, I/O limits, etc.)—network architecture will be pushed into new technology transitions, expanding total addressable market (TAM). It estimates the combined optical-related market (fiber, scale-out, scale-across) at roughly $30 billion in 2025, and notes it has grown at around ~40% CAGR over the past four years, driven by AI data-center investment.

As speeds rise and the “optical reach” expands, even if some approaches (especially on-board CPO) compress the profit pool of traditional optical modules, the base case still points to optical communications scaling toward roughly $90 billion.

Morgan Stanley breaks its 2028 TAM into Scale-Up / Scale-Out / Scale-Across, estimating approximately $9.4 billion, $64.0 billion, and $9.1 billion, respectively—about $82.5 billion in total.

(Scale-Up / Scale-Out / Scale-Across correspond to vertical, horizontal, and cross-region expansion in data centers.)

Based on Morgan Stanley's scoring of each company's exposure intensity in sub-segments:

– LITE is broader and more proactive in “new architecture” directions;

– COHR leans more toward the largest current “core market” in optics, and stands out more in areas like rack-level “fiber replacing copper interconnect.” Its scoring looks a bit weaker in some CPO sub-areas.

That said, this scoring may be somewhat static: NVIDIA's wording around this latest investment/cooperation suggests both companies are being pulled into its CPO-related purchase/integration system. And practically speaking, NVIDIA is unlikely to rely on a single optical component supplier for critical parts—dual-sourcing (or multi-sourcing) fits its supply-chain risk logic much better.

3) Manufacturing and Capacity: The Real Growth Foundation—Coherent Is Moving Faster

InP (indium phosphide) is a III-V compound semiconductor known for features like a direct bandgap, high electron mobility, and low optical loss. InP substrates are foundational materials for optical devices—basically the “bedrock” of optical chips—on top of which epitaxy builds key structures like lasers and detectors.

Coherent has a larger manufacturing footprint and has been more aggressive in capacity upgrades. In 2025, it completed a key transition: moving InP laser production in two fabs from traditional 3-inch wafers to 6-inch wafers. New 6-inch InP lines came online at its Sherman, Texas facility and its Järfälla site near Stockholm, Sweden. Management expects this shift can drive over 60% long-term die cost reduction. A bigger expansion plan and faster ramp give it an edge in deliverable supply capability.

Lumentum is also expanding, but with a slightly different rhythm and scale. Its InP wafer capacity is mainly concentrated in San Jose, California, where upgrades are underway. The company has disclosed roughly $43 million of investment to lift InP chip capacity by about ~40%. NVIDIA's $2 billion investment more directly points to building a brand-new InP wafer fab in the U.S., adding a fresh layer of upside optionality to Lumentum's capacity curve.

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