Key Takeaways:
Lumentum Holdings Inc. shipped a record volume of laser chips in its fiscal third quarter as surging AI infrastructure investment created a supply bottleneck for the indium phosphide components that power high-speed optical networking. The company's 200G EML (electro-absorption modulated laser) revenues more than doubled sequentially, while total laser chip shipments doubled year over year, Lumentum said in its earnings report.
"We simply cannot make these chips fast enough to satisfy customer demand," Michael Hurlston, chief executive officer of Lumentum, said on the earnings call. "The immense cloud and AI opportunity is driving demand that will exceed supply at least into calendar 2026."
The shortage reflects a structural mismatch between the capacity of indium phosphide (InP) manufacturing and the pace of AI data center construction. Lumentum's laser chips are a critical building block for 800G and upcoming 1.6T optical transceivers, which connect graphics processing units across AI clusters at speeds copper interconnects cannot reach. With its wafer fab in Japan fully allocated, Lumentum acquired a fifth InP fab to expand production. Management expects EML unit volumes to grow more than 50% by the December 2026 quarter.
The opportunity extends beyond near-term shipment growth. Lumentum's internal deployment of continuous-wave lasers strengthens vertical integration, capturing more value across the optical networking stack. The company's optical circuit switch backlog now exceeds $400 million, and its co-packaged optics program — where ultra-high-power laser chips are integrated directly into switch packages — is on track for meaningful revenue generation by late 2026, supported by a multi-hundred-million-dollar purchase order.
Why InP Supply Is the Next AI Bottleneck
The indium phosphide supply chain is far narrower than silicon photonics foundry capacity, creating a bottleneck that could constrain AI infrastructure buildouts. On July 14 alone, UMC and Tower Semiconductor announced on the same day the first mass-produced 300mm silicon photonic wafers and a $3 billion expansion plan, respectively — a collective supply-side response to demand that analysts estimate could require tens of millions of optical modules annually from a single national project like South Korea's 8.4GW AI data center plan.
The paradox is that the more silicon photonics wins market share, the more InP light sources it requires. Each optical module, regardless of architecture, still needs an InP laser. Lumentum's position as a vertically integrated InP manufacturer — from epitaxial wafers through finished laser chips — gives it a structural advantage over competitors that rely on external suppliers.
Competitive Landscape and Valuation
Lumentum competes directly with Applied Optoelectronics Inc. and Broadcom Inc. in AI optical networking. Applied Optoelectronics, which broke ground on a 400,000-square-foot Texas transceiver campus, posted Q1 2026 revenue of $151.1 million, up 51% year over year, with data-center revenue more than doubling to $81.4 million. Broadcom combines Ethernet switching, digital signal processors, and EML lasers with deep hyperscaler partnerships.
Lumentum guided fourth-quarter fiscal 2026 revenue of $960 million to $1.01 billion, up sequentially from the record $808.4 million reported in Q3, which represented 90% year-over-year growth. Non-GAAP operating margins are expected to reach 35% to 36%, expanding from 32% in the prior quarter as higher laser chip shipments and a richer product mix drive profitability.
Lumentum shares have gained 108% year to date, compared with Applied Optoelectronics' 221% surge and Coherent's 67% advance. The company trades at a premium to historical multiples, reflecting the market's expectation that InP supply constraints will persist as AI data center capacity expands. With global announced AI data center projects reaching 190GW and expected investment of $5.5 trillion by 2030, according to industry estimates, Lumentum's laser chip business faces a demand environment that could keep its fabs running at full capacity for years.
This article is for informational purposes only and does not constitute investment advice.
