Investment Potential of Optical Chips and Optical Modules
Optical chips currently offer greater long-term investment potential than optical modules due to scarcity, pricing power, and strategic positioning in AI-driven data center infrastructure.
Optical Modules: High Demand but Limited Margins
Optical modules act as electro-optical converters, bridging electrical signals and optical transmission in data centers. They are critical for AI clusters, with the market growing from ~$16.5B in 2025 to ~$26B in 2026, driven by 800G and 1.6T transceivers . Chinese firms dominate volume, with InnoLight and Eoptolink controlling over 60% of global market share . However, these companies are largely price-takers, earning net margins of 20–38% because they do not control the scarce upstream components like EML laser chips or DSPs . While modules are demand-certain, their profitability is constrained, and valuations are already stretched .
Optical Chips: Scarcity and Pricing Power
Optical chips, including EML lasers and DSPs, sit upstream in the supply chain and are produced by very few firms globally. For example, Lumentum is the only company shipping 200G/lane EMLs at volume, while Broadcom and Marvell dominate the DSP/switch-silicon layer with gross margins around 68% . These chips capture scarcity rent, giving them durable pricing power and higher profit potential. As AI clusters scale, the bottleneck shifts to data transmission channels, making silicon photonics and co-packaged optics (CPO) technologies increasingly critical . Companies investing in these upstream technologies benefit from structural advantages rather than cyclical volume fluctuations.
Technological Shift: CPO and Silicon Photonics
The industry is transitioning toward CPO and silicon photonics, embedding optical engines directly into ASICs and switches. Nvidia's Spectrum-X switches exemplify this shift, improving energy efficiency and reliability while reducing reliance on traditional optical modules . This trend suggests that optical modules may face obsolescence in certain high-performance AI applications, whereas optical chips and silicon photonics remain central to next-generation infrastructure.
Investment Implications
- Short-term growth: Optical modules may see near-term revenue from AI cluster expansion, but margins are limited and competition is intense .
- Long-term potential: Optical chips and silicon photonics offer higher profitability, scarcity-driven pricing, and strategic importance in AI infrastructure .
- Risk profile: Modules are exposed to commoditization and CPO disruption, while chips benefit from technological barriers and limited suppliers.
- Portfolio strategy: Upstream chip suppliers are suitable for core, long-term holdings, while module manufacturers may serve as high-beta, short-term plays . Conclusion: While optical modules are essential and currently in high demand, optical chips provide superior investment potential due to scarcity, pricing power, and alignment with the structural evolution of AI data center technology. Investors seeking durable returns should prioritize upstream chip suppliers and silicon photonics innovators over downstream module assemblers.
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