Optical Notes: Some Healthy Debate
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Morgan Stanley observes a shifting preference within the communication infrastructure space, noting that networking equipment stocks have recently gained more support compared to optical communication names. Over the past month, networking equipment stocks such as ANET and CSCO rose by 6.7%, while optical stocks declined by 10%. The firm notes that the debate surrounding optical communications has shifted from demand discovery to margin sustainability, driven by uncertainties regarding the timing of CPO/NPO technologies, laser competition, and the scaling differences between AI training and inference workloads.
Due to a lack of spot market data points, short-term volatility in the optical sector is expected to persist, maintaining a preference for networking equipment names. Within the optical space, Corning (GLW) remains the clearest beneficiary, supported by Fujikura raising its full-year operating profit outlook by 47%. Meanwhile, Lumentum (LITE) and Coherent (COHR) may present interesting opportunities ahead of their early August earnings, although Source Photonics' announced $1.2 billion laser capacity expansion could pressure long-term margin expectations.
The expansion primarily impacts the CW laser market rather than EML. Ciena (CIEN) carries higher risk, as the inference versus training dynamic could alter the competitive pricing landscape. Overall, Morgan Stanley maintains an In-Line industry view, emphasizing that optical content additions remain more critical than specific form factors.
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