SEQH CAPITAL RESEARCH - TEAR SHEET
LIGHT IS THE INTERCONNECT - PHOTONICS IS PUTTING UP ITS STRONGEST TAPE OF 2026
WHAT THIS REPORT ARGUES
The photonics trade is being supported by accelerating revenue, rising guidance, higher optical content per AI accelerator, and a shortage of indium-phosphide laser capacity.
SEQH’s central conclusion is that optics remains early in a multi-year AI infrastructure buildout: the eight-company basket produced 34.7 percent revenue-weighted year-over-year growth in its latest quarter, while the report’s base case sees the AI-optics market expanding from $16.5 billion in 2025 to $61.7 billion by 2030.
The tape
The eight-name photonics basket is up a median 86.1 percent year to date, versus 15.1 percent for the S&P 500.
Leadership has been strongest in scarcity-sensitive component names: AXT, Applied Optoelectronics, and Lumentum.
The report argues that the October rebound after a brief AI-led market selloff showed buyers are focused on order books, revenue acceleration, and supply constraints rather than short-term AI sentiment.
Dedicated thematic capital is also entering the space through products such as the Roundhill Photonics and Optics ETF, widening the potential buyer base for the sector.
Fundamentals are accelerating
The basket generated roughly $11.5 billion in latest-quarter revenue, with 34.7 percent weighted growth and 65.5 percent median growth.
Every name in the basket grew revenue double digits year over year and guided to additional sequential growth.
Excluding Corning’s diversified total-company revenue base, weighted basket growth rises to about 50.7 percent.
The report sees the strongest operational leverage at the laser, substrate, DSP, and transceiver layers, where AI demand meets constrained supply.
Lumentum is the bellwether
Lumentum reported quarterly revenue of roughly $1.01 billion, up 109 percent year over year, with non-GAAP gross margin of 50.4 percent.
Its next-quarter guide of $1.225 billion to $1.275 billion implies another roughly 24 percent sequential revenue step at the midpoint.
Management expects the first quarter with more than $100 million of optical circuit switching revenue, while 200G EMLs, 1.6T transceivers, external laser sources, and cloud transceiver demand continue to ramp.
The report treats Lumentum’s reported “sold out through 2029” optoelectronic-parts commentary as evidence that the sector remains supply constrained rather than demand capped.
Other key company read-throughs
Coherent is increasingly a datacenter company: Datacenter and Communications reached 79 percent of revenue, while internal InP laser output rose about 80 percent year over year.
Applied Optoelectronics guided to the sharpest sequential growth in the basket, with Q3 revenue guidance implying roughly 42 percent growth quarter over quarter and datacenter demand driving 800G and 1.6T ramps.
Ciena reported 37 percent growth, an $8.5 billion backlog, and expects more than 30 percent growth in FY2027 as cloud and interconnect demand rises.
Fabrinet continues to benefit from transceiver manufacturing demand, with new capacity expected to add several billion dollars of revenue capability in early 2027.
Credo combines more than 100 percent revenue growth with the strongest profitability in the basket, posting a 68 percent non-GAAP gross margin.
AXT is the substrate expression of the cycle, with record InP revenue and plans to more than double quarterly InP capacity by the end of 2027.
The market size is still expanding
The report links AI-optics demand directly to hyperscaler capital expenditure. The largest U.S. cloud platforms are guiding to roughly $733 billion of 2026 capex, rising toward about $825 billion when Oracle is included.
SEQH’s base case assumes the optical share of capex rises from approximately 3.1 percent today to 3.9 percent by 2030, driving a 30.2 percent CAGR in AI-optics TAM.
The base case reaches $61.7 billion by 2030, while the bull case reaches roughly $101 billion.
Optical content per accelerator is also rising as platforms move from 800G to 1.6T, from scale-out toward scale-up fabrics, and increasingly toward co-packaged optics and optical circuit switching.
Three technology transitions are running at once
800G to 1.6T pluggables are moving into volume production, raising bandwidth and optical content per port.
Co-packaged optics is entering production, shifting value from traditional pluggable modules toward high-power external lasers, fiber, passives, and switch-adjacent optical engines.
Optical circuit switching is emerging as a major new system-level revenue stream, with the report citing market potential above $8 billion to $11 billion by 2030.
The key argument is that these transitions add revenue layers rather than simply cannibalizing one another.
InP is the binding constraint
Indium-phosphide EML and laser demand is estimated to exceed supply by roughly 30 percent, with a separate estimate pointing to a 2026 EML shortfall near 17 percent.
This scarcity is the report’s main explanation for the sector’s margin expansion and valuation premium.
Coherent is scaling six-inch InP production, which can yield roughly four times as many die as a three-inch wafer at about half the cost per device.
AXT expects quarterly InP capacity to rise from about $60 million exiting 2026 to approximately $130 millionexiting 2027.
The key policy date is November 27, 2026, when China’s suspension of export restrictions on gallium, germanium, and antimony to the U.S. expires.
Valuation: growth and margin explain the premium
The report finds a strong relationship between forward price-to-sales multiples and reported revenue growth across the basket, with a correlation of 0.77.
Gross margin has an even stronger relationship with valuation, with a correlation of 0.80, indicating that the market is rewarding pricing power as much as simple revenue growth.
Lumentum trades at a premium because investors are pricing additional revenue layers such as OCS, CPO lasers, and 1.6T transceivers.
Fabrinet and Applied Optoelectronics screen as lower-multiple growth names, although their lower gross margins partly explain that discount.
The basket trades at a median 42.1x forward earnings, compared with about 20.9x for Nvidia, Broadcom, and Marvell, reflecting the market’s expectation that optical content will outgrow compute content through the next platform cycle.
Bottom line
The cleanest takeaway is that the photonics rally is not being driven by momentum alone. Revenue, margins, backlog, capacity additions, and supply scarcity are all moving in the same direction.
The main risk is that hyperscaler capex digestion, export controls, architecture shifts, customer concentration, or capacity funding eventually interrupt the cycle.
For now, SEQH sees the optical stack as one of the highest-beta and most fundamentally supported expressions of AI infrastructure spending.
What readers get in the full PDF BELOW
Upgrade to access the complete sector update, including:
The full eight-name photonics scorecard with revenue, growth, margins, guidance, valuation, and relative-performance data.
A detailed AI-optics TAM model through 2030 under bear, base, and bull capex scenarios.
The full roadmap for 1.6T, 3.2T, co-packaged optics, optical circuit switching, and scale-up fabrics.
The complete InP supply-chain analysis, including capacity expansion, substrate scarcity, and China export-control risk.
The full quantitative valuation regression, residual analysis, China-module-maker demand benchmark, and sector catalyst calendar.
