Concerns about the disruption of the new AI darling CPO are overstated, JP Morgan raises target prices for Coherent and Lumentum

After experiencing a half-year of industrial gloom, investors in the optical components industry seem to finally be able to breathe a sigh of relief.

According to news from the Chasing Wind Trading Desk, on June 12, JP Morgan released two research reports, pointing out that the CPO (Co-Packaged Optics) industry is nearing a critical point of explosion, and is optimistic about the fundamentals of optical component leaders Coherent and Lumentum. JP Morgan stated that CPO is set to enter mass production in the second half of 2025 and will reach a scaling turning point in 2027, with a growth trajectory significantly accelerated compared to any previous technological transformation in the optical communication industry.

Previously, the optical module industry faced a series of clouds, from price wars over 800G products, delays in the iteration of 1.6T technology, to the potentially devastating "disintermediation" threat posed by Co-Packaged Optics (CPO). JP Morgan analysts clearly pointed out that the industry has successfully alleviated most concerns, especially the "sword of Damocles" of CPO hanging over all traditional manufacturers.

CPO: Arriving Faster, but Disruption Far Lower than Panic Expectations

The exponential demand for computing power from AI large models is ruthlessly squeezing the power budget of data centers.

Industry forecasts predict that the total power consumption of data center hardware will surge from 50GW in 2023 to 150GW in 2029. Even more alarming is that the power consumption of optical transceivers based on existing technology is expected to increase nearly tenfold. This unsustainable growth forces the entire industry to seek technological solutions, and CPO is the solution that is highly anticipated.

By co-packaging the optical engine and switching chip, CPO technology brings tangible performance advantages:

• Power consumption reduced by over 30%: Effectively alleviating the bottleneck of "computing power expansion = energy consumption explosion" in data centers;
• Significant performance improvement: High-speed signals avoid losses caused by long-distance transmission on PCBs;
• Port density doubled: Supporting the explosive data flow demands of AI clusters.

Although technical challenges such as thermal management and reliability still exist, the maturity of pluggable external lasers and liquid cooling technology is rapidly clearing these obstacles.

What truly surprised the market was the timeline for CPO commercialization. Driven by giants like Nvidia, its progress is much faster than the industry expected:

• Second half of 2025: CPO switches begin small-batch shipments.
• 2027: A substantial market turning point is reached, with 3.2T CPO solutions starting to scale.
• 2030: The market size is expected to exceed $5 billion.

Although the outbreak of the CPO industry has come faster than the market expected, the rise of CPO does not mean the demise of traditional pluggable optical modules.

Analyst data shows that the pluggable transceiver market will still be an absolute mainstay in the coming years, with its market size expected to grow from USD 11 billion in 2025 to USD 23 billion in 2030, with a compound annual growth rate as high as 17%.

In other words, the market's previous panic over "disruption" has been overly amplified. CPO is not meant to "kill" the existing supply chain, but rather creates an incremental market, with existing optical suppliers like Coherent and Lumentum still playing an indispensable role.

From "Victim" to "Core Beneficiary": Revalued Profitability

Another key point emphasized in the research report regarding the reversal logic is the profitability of the CPO business.

The market was previously concerned that this "hard nut to crack" would lower profits, but the reality is quite the opposite. Both Coherent and Lumentum have clearly stated that the gross margin of the CPO business will be significantly higher than the company's average level, expected to reach over 50%, while the gross margin of traditional pluggable transceivers is only in the 30% range.

According to market forecasts for 2030, the CPO business may account for 19% of these companies' total revenue at that time, but will contribute as much as 27% of gross profit.

CPO is not a drag, but a powerful profit engine. Based on this logic reconstruction, JP Morgan has given a more positive assessment of industry leaders:

• Coherent: The investment logic of the company lies in the steady realization of its investors' daily goals. JP Morgan predicts that it will achieve a 10% revenue growth in fiscal years 2026 and 2027, with gross margins reaching 39% and 40% respectively, driving the EPS for fiscal year 2027 to USD 5.70, which is 4% higher than the market consensus. With the threat of CPO eliminated, its position as a core supplier is further solidified, and the target price-to-earnings ratio has been raised to 22 times, with the target price adjusted to USD 100.

• Lumentum: Lumentum's logic is more closely centered around AI. Through the acquisition of Cloud Light, the company's layout in the data center field is considered precise. Analysts expect that, driven by the strengthening demand for telecom DCI and the increase in Cloudlight's market share, the company's quarterly revenue targets are likely to be achieved. At the same time, the EPS expectations for fiscal years 2026 and 2027 have been raised to USD 4.20 and USD 5.90 respectively. Given its leadership position in the CPO laser sector, the target price-to-earnings ratio has also been raised to 20 times.**

The research report points out that, in addition to the two mentioned above, companies benefiting from the CPO supply chain are widely distributed:

• Broadcom: Market leader in CPO technology, has launched a third-generation product line;
• Nvidia: Launched the CPO-based Quantum-X800 and Spectrum-X platforms;
• TSMC: Became a key technology promoter of CPO through the COUPE platform;
• Corning: Key provider of optical fibers and connectors;
• Fabrinet: CPO manufacturing and packaging service provider.

Risk Warning: Potential Reefs in an Optimistic Outlook

Of course, there is no such thing as a zero-risk investment. Investors in the optical components industry still need to remain vigilant:

• Pricing Pressure: This is a long-term challenge for the industry. Although new generation technologies can bring short-term bargaining power, the pressure of price erosion always exists.
• Customer Vertical Integration: System equipment manufacturers like Cisco and Ciena may seek to vertically integrate optical components in the future to further cut costs, which will directly threaten upstream suppliers.
• Company-Specific Risks: Coherent faces integration challenges from newly acquired businesses, while Lumentum needs to deal with the risk of high customer concentration (such as Google).

As emphasized in the JP Morgan research report, the optical components industry is transitioning from a market dominated by fears of technological disruption to one supported by strong fundamentals driven by AI.

The development path of CPO technology is clearer than expected; it is not a disruptor but a high-value catalyst. For investors, the key lies in identifying those leading players who can successfully position themselves in this technological evolution with core technological strength and enjoy higher profit margins