Optical, Round Two: The Mispriced, the Conditional, and the Worth Paying Up For

Damnang · Damnang’s Substack · September 04, 2026 at 08:10 · ⏱ 12 min read  | Read on Substack ↗
Summary
The recent 42% drawdown in optical stocks is driven by multiple compression from rising rates and high capital expenditures, rather than deteriorating fundamentals. AI networking budgets are shifting away from memory density toward scale-up interconnects and optics, creating distinct winners in external light sources and optical circuit switches while pressuring traditional front-panel assembly and merchant DSPs.
  • •Optical stocks fell 42% on average from 52-week highs, despite 11 of the 12 reporting names growing revenue over 20% year-over-year.
  • •Rising long-term rates disproportionately compressed optical multiples because the bulk of profits from CPO, NPO, and OCS are weighted toward 2027 and 2028.
  • •AI system budgets are reallocating from HBM memory density (as seen in the Rubin Ultra generation) toward the networking and optics required to bind 576 GPUs together.
  • •The electrical-to-optical conversion boundary is moving from the switch front panel into the package (CPO/NPO), which benefits light sources and InP substrates but hurts front-panel module assembly.
  • •Optical circuit switches (OCS) are removing an entire electrical switching tier, opening a $4B+ market where Lumentum and Coherent are the primary beneficiaries.
  • •Yield and testing are becoming critical bottlenecks, driving demand for wafer-stage burn-in (known good die) before packaging to prevent scrapping entire GPU packages.
Read time 12 min
Length 12,220 chars
Category finance
Ideas
Damnang Substack author, Damnang’s Substack
The author is explicitly monitoring AAOI's remaining At-The-Market (ATM) equity capacity, highlighting the ongoing risk of shareholder dilution as the company burns cash to fund expansion.
AAOI MED
Damnang Substack author, Damnang’s Substack
The author is tracking Coherent's initial revenue recognition from Co-Packaged Optics (CPO) and Optical Circuit Switches (OCS) as primary catalysts for the next phase of optical deployment.
COHR MED
Damnang Substack author, Damnang’s Substack
Author highlights Lumentum as a core NVIDIA partner for External Light Sources (ELS) and notes the company is guiding to its first $100M-plus quarter in fiscal Q1 for Optical Circuit Switches (OCS).
Author highlights Lumentum as a core NVIDIA partner for External Light Sources (ELS) and notes the company is guiding to its first $100M-plus quarter in fiscal Q1 for Optical Circuit Switches (OCS). Risk: Deployment of scale-up links and Lumentum's 6-inch InP capacity are slated for 2028, meaning revenue realization is heavily back-weighted and vulnerable to rate-driven multiple compression.
LITE
Damnang Substack author, Damnang’s Substack
Author notes that yield and test are becoming the real bottleneck for in-package optics, pointing out that Aehr secured repeat orders from its lead Silicon Photonics (SiPh) customer and added a second
Author notes that yield and test are becoming the real bottleneck for in-package optics, pointing out that Aehr secured repeat orders from its lead Silicon Photonics (SiPh) customer and added a second major SiPh customer in 2026. Risk: The dollar pool for optical testing is currently small and lacks standardized processes, making the revenue stream lumpy.
AEHR
Damnang Substack author, Damnang’s Substack
Author points out Credo's GAAP gross margin contraction and notes that the architectural shift toward Co-Packaged Optics (CPO) and Linear Drive Pluggable Optics (LPO) will shrink merchant DSP content
Author points out Credo's GAAP gross margin contraction and notes that the architectural shift toward Co-Packaged Optics (CPO) and Linear Drive Pluggable Optics (LPO) will shrink merchant DSP content per port. Risk: Credo's specific reliability features (like ZeroFlap) could maintain a niche market share if DSP-less architectures suffer from high link-drop rates during massive training jobs.
CRDO
Damnang Substack author, Damnang’s Substack
Author states that scale-across links between data centers are driving demand for coherent optics, citing Ciena's $8.5B backlog and Hyper-Rail as the first concrete orders in this flow.
Author states that scale-across links between data centers are driving demand for coherent optics, citing Ciena's $8.5B backlog and Hyper-Rail as the first concrete orders in this flow. Risk: Telecom and broader data center interconnect (DCI) spending can be cyclical and subject to hyperscaler capital expenditure lumpiness.
CIEN
Damnang Substack author, Damnang’s Substack
Author notes Corning supplies fiber and connectors for NVIDIA's ecosystem and validates their 'form-factor-agnostic' claim as a legitimate fiber-count calculation benefiting from rack-to-rack scale-up
Author notes Corning supplies fiber and connectors for NVIDIA's ecosystem and validates their 'form-factor-agnostic' claim as a legitimate fiber-count calculation benefiting from rack-to-rack scale-up. Risk: Corning was the only optical name whose next-quarter guidance came in below consensus during the August earnings season.
GLW
Damnang Substack author, Damnang’s Substack
Author highlights that Fabrinet lost datacom volume at its largest customer and categorizes front-panel module assembly as a structural 'loser' in the shift toward in-package optics.
Author highlights that Fabrinet lost datacom volume at its largest customer and categorizes front-panel module assembly as a structural 'loser' in the shift toward in-package optics. Risk: Fabrinet is still listed as handling system assembly for NVIDIA's broader silicon photonics ecosystem, which could offset front-panel module losses.
FN
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This newsletter, published September 04, 2026, features Damnang discussing AAOI, COHR, LITE, AEHR, CRDO, CIEN, GLW, FN. 8 trade ideas extracted by AI with direction and confidence scoring.

Speakers: Damnang  · Tickers: AAOI, COHR, LITE, AEHR, CRDO, CIEN, GLW, FN