Optical interconnects are emerging as a key theme in AI infrastructure, according to a market analysis article published by PANews columnist qinbafrank. The piece argues that demand from AI data centers is real and accelerating, and that the industry has now moved from a demand-validation phase into a supply-bottleneck phase, with capacity for indium phosphide, or InP, laser chips identified as the main constraint.
The author highlights two immediate catalysts. First, Nvidia Senior Vice President Gilad Shainer said at a recent technical forum that co-packaged optics, or CPO, has entered mass production. Switches developed by Nvidia and its supply chain partners have already been delivered to close customers and are also being deployed within Nvidia’s own facilities. He added that a large number of switches using CPO technology are expected to be introduced into AI factories globally this year.
Second, Lumentum CEO Michael Hurlston said shortages of InP lasers used in AI could be more severe than the memory crisis.
CPO production is seen as the start of business delivery
The article says the start of CPO shipments matters because the market may begin to price in a gradual ramp as volume production turns into real business delivery. In the author’s view, that marks a shift from concept and expectation toward execution.
The piece also looks back at recent sector performance. It says optical interconnects were among the earliest semiconductor segments to correct and also spent the longest time in adjustment. The author cites a Bernstein report from mid-May that said CPO would not materialize as quickly as some had expected and that the main focus for this year should remain on optical modules and connectivity. After that, the broader optical segment started to pull back, while connectivity names in U.S. equities held up better.
Shortage concerns are returning to the market narrative
Another part of the bullish case is the market’s sensitivity to supply shortages. The article says investors still have a strong memory of what shortage cycles can do, so any sign of tighter InP laser supply is likely to draw attention quickly.
At the same time, the author argues that the sector is not being discussed heavily right now, with semiconductor attention more concentrated on memory. In that setup, optical interconnects present what the article describes as a larger expectation gap.
The piece adds that earnings from hyperscale cloud service providers, or CSPs, have started to show returns on capital expenditure, supporting the case for faster data center construction. As deployments of 10,000-GPU clusters and large-scale data center interconnects expand, demand for optical interconnect products is also rising.
Technology paths point to coexistence, not a zero-sum switch
The article lays out a three-part roadmap for the segment:
- For scale-up, meaning inside the rack, copper cables and pluggable solutions remain the main options.
- For scale-out, meaning across racks and across data centers, CPO is expected to penetrate first. The article says power consumption can drop from 30W to 9W per port, while bandwidth rises sharply.
- Over the next 18 to 24 months, pluggable optical modules are expected to remain the dominant approach. CPO and pluggables are not framed as a zero-sum trade, and the author expects both to coexist at least through 2027.
In that framework, Nvidia’s move into volume CPO production is described as a historical signal, but not one that eliminates pluggable solutions in the near term.
Industry bottleneck is now centered on InP laser chip capacity
The article’s main conclusion is that optical interconnect demand has now been verified across the supply chain, while the decisive constraint is shifting to InP laser chip capacity. The author writes, “Demand has been validated across the full chain, and the bottleneck is in InP lasers; whoever can move fastest on in-house production or capacity expansion, with the safest supply chain, will capture the greatest upside.”
The piece also flags the next two weeks as an important window for earnings reports from companies in the optical interconnect space. If those reports provide more confirmation on demand, the author says that period could become a fresh catalyst window.
The article was written by qinbafrank. PANews noted that the piece reflects the columnist’s personal views, not the outlet’s official position, and does not constitute investment advice.