TradingKey - On October 9, U.S. optical communication concept stocks generally rose in pre-market trading, with Applied Optoelectronics (AAOI) up over 5%, Lumentum (LITE) up over 4%, and MaxLinear (MXL), Coherent (COHR), and AXT (AXTI) all gaining over 3%. The primary catalyst for the sector's rally came from recent comments by optical communications leader Lumentum. Company CEO Michael Hurlston stated that, driven by demand for AI data center construction, the company's optical component capacity has been booked out by customers through early 2029.

Source: TradingView

In an interview in Tokyo, Japan on Friday, Hurlston revealed that despite the company's efforts to accelerate capacity expansion, its current production capacity still fails to meet customer demand. For some products, there will still be a demand gap of about 70% by 2027, while for others, approximately 30% of demand may remain unmet even by 2028. He emphasized that the company is raising capacity as much as possible, but there is still no clear sign of relief for the current supply-demand imbalance.

Compared with April this year, Lumentum's order visibility has extended further. At that time, the company expected its full-year 2028 capacity to be fully booked within the next two quarters; now, capacity allocation has stretched into early 2029, reflecting how AI cluster upgrades continue to push up demand for high-speed optical components.

Lumentum primarily provides indium phosphide components, optical chips, lasers, and other photonic products, which are widely used in cloud computing, AI data centers, and high-speed communication networks. As GPU cluster sizes expand, data transmission volume between servers is increasing rapidly, making optical communication technology a crucial factor in determining the operational efficiency of AI infrastructure. Driven by the simultaneous expansion of demand and capacity, analysts expect Lumentum's sales could more than double this year.

Earlier this year, Nvidia (NVDA) invested $2 billion each in Lumentum and competitor Coherent to secure the supply of key optical communication components. Facing a supply shortage, some hyperscale cloud providers have also begun to share suppliers' expansion risks through long-term procurement agreements and capital support.

Over the past two years, Lumentum has increased the capacity of its key plant in the Greater Tokyo Area by 12-fold, and plans to invest at least an additional $350 million in that facility and nearby sites, while also expanding production capacity at its Caswell plant in the U.K. However, Hurlston noted that adding optical component capacity typically takes 3 to 5 years, so even if the company continues to expand capacity, the supply deficit is unlikely to disappear quickly.

In addition to internal expansion, Lumentum may also supplement its existing product line through mergers and acquisitions. Hurlston stated that the company may look for acquisition opportunities next year that could bring new technology and additional production capacity to cover business segments it currently lacks.

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