BofA Securities analyst Vivek Arya met several optical and networking component vendors at the industry’s flagship Optical Fiber Communications (OFC) conference in San Francisco this week. 

This year’s OFC seemed extra relevant due to the increasing importance of optical innovations in enabling higher-speed AI clusters. 

Historically, high competition and pricing pressures have hurt the optical industry.

Also Read: Marvell Launches Next-Gen Connectivity to Meet Rising AI Demands in Data Infrastructure

Still, the rising tide of AI is so strong, the vendors appear more confident in projecting growth for the next few years ($10 billion in calendar 2024, going to $30 billion by calendar 2029, per Lumentum/Lightcounting), significantly as it’s levered to capex from strong US cloud customers with a mission-critical need to invest in AI, versus more prior cycles driven by cyclically exposed global telcos.

Within optical components, Arya is most positive on Broadcom Inc (NASDAQ:AVGO) (price target $260) in large-cap and Coherent Corp (NYSE:COHR) (price target $125) in SMIdcap, though he also noted positive sentiment at Credo Technology Group (NASDAQ:CRDO) (price target $75), Lumentum Holdings (NASDAQ:LITE) (price target $85), Marvell Technology (NASDAQ:MRVL) (price target $120) and MACOM Technology Solutions Holdings (NASDAQ:MTSI) (price target $160).

Going into OFC and last week’s Nvidia Corp (NASDAQ:NVDA) GTC, the prevailing concern was the imminent launch of co-packaged optics (CPO) solutions in scale-out (between racks) and scale-up (within AI rack), potentially impacting the current discrete pluggable market that uses optical transceivers (Tx) with digital signal processors (DSP).  

The reality was that Nvidia mentioned but did not launch any new scale-up solution. In some instances, the roadmap still relies heavily on copper or linear pluggable (LPO). Nvidia’s CPO announcements are spread out in the second half of 2026 for InfiniBand and in the second half of 2027 for Ethernet, indicating no real urgency in deployment. 

Meanwhile, during OFC, Arya heard talks from Alphabet Inc (NASDAQ:GOOG) (NASDAQ:GOOGL) Google, and Meta Platforms Inc (NASDAQ:META), showing no specific interest in abandoning the operationally sound pluggables approach to jump to CPO. 

CPO can indeed save on space and power, but it comes at higher operational costs and has yet to be proven reliable. Any major deployment is pushing out to later this decade despite the strong tech offerings from CPO leader Broadcom and then Nvidia. Overall, Arya remains confident in the pluggable growth at Coherent and key DSP supplier Marvell Technology.

Arya attended Lumentum’s Analyst Day, where management raised its intermediate-term growth projections towards $3 billion from $2.4 billion given at last year’s OFC.  Per Lumentum, it’s on track to achieve its $500 million quarterly run rate, exiting this year with $600 million+ per quarter in 6-9 months thereafter and $750 million a year later. 

Interestingly, the increase from $2.4 billion to $3 billion is driven more by optical circuit switches (OCS) and high-speed continuous wave (CW) lasers rather than optical Tx, which could help from a margin perspective.  Arya maintained the Underperform rating until he got a better indication of OCS industry demand outside Google’s captive OCS switch. Arya prefers Coherence, which is exposed to many of the same trends but with more attractive valuation and margin expansion opportunities.

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