Lighting Up the Fiber: How Lumentum, Coherent, and Fabrinet Are Capitalizing on the Optical Transceiver Boom

The global optical transceiver market is on fire, fueled by surging demand for high-speed data transmission in AI-driven data centers, 5G networks, and hyperscale cloud infrastructure. At the heart of this boom is a critical component: the 200G EML (externally modulated laser). However, a shortage of these lasers has created a supply chain bottleneck that's reshaping the industry—and creating opportunities for three key players: Lumentum (LITE), Coherent (COHR), and Fabrinet (FN).

The 200G EML Shortage: A Supply Chain Crossroads

The shortage of 200G EMLs—a high-performance laser essential for 800G and 1.6T optical transceivers—is the defining challenge of 2025. Demand for these lasers, which enable ultra-fast data transmission over long distances, has outpaced supply by a wide margin. Key constraints include:

1. Limited Capacity: Manufacturers like Lumentum and Broadcom are struggling to ramp up production of hermetic packages and indium phosphide wafers, critical for EML fabrication.
2. Technological Complexity: EMLs require precision engineering and cleanroom facilities, which are slow and costly to scale.
3. Structural Demand: The shift to AI-driven data centers, which require 1.6T transceivers for GPU clusters, is accelerating the shortage.

The result? Optical transceiver manufacturers face delayed production timelines and margin pressures. Lumentum, a major EML supplier, saw its non-GAAP gross margin dip to 32.3% in Q2 2025 as yield issues and capacity constraints bit. Yet, this pain is also a catalyst for innovation—and opportunity.

Lumentum: Navigating the Storm with Expanded Capacity

Lumentum is both a victim and a beneficiary of the EML shortage. While its Cloud & Networking segment faces near-term headwinds, the company is making aggressive moves to dominate the long-term market:

• Capacity Expansion: Lumentum aims to boost 200G EML production by 40% by mid-2025 and another 40% by year-end. This requires $663.4M in capital expenditures to expand cleanroom capacity and indium phosphide wafer throughput.
• Vertical Integration: By controlling key components like hermetic packages and lasers, Lumentum reduces reliance on external suppliers and ensures priority access for its customers (e.g., Cisco, Microsoft).
• Strategic Pricing: The company is leveraging its market position to negotiate higher prices for constrained EMLs, potentially offsetting margin pressures as volumes recover.

Investors should note that Lumentum's stock has underperformed peers this year, but its Q2 guidance for sequential revenue growth (+6%) suggests the worst may be behind it. The risk: EML shortages could linger longer than expected, but the reward: Lumentum's scale and R&D investments position it to capture the $2.5B+ EML market by 2026.

Coherent: Leading the Silicon Photonics Revolution

While Lumentum battles EML constraints, Coherent is betting on silicon photonics (SiPh) as a game-changer. The company's SiPh-based transceivers—such as its 1.6T-DR8 modules—offer a cost-effective alternative to EML-heavy designs:

• Cost and Power Efficiency: SiPh modules use cheaper CW lasers and leverage mature semiconductor manufacturing, reducing costs by 10–20% versus EML-based solutions. Coherent's Linear Receive Optics (LRO) technology further cuts power consumption by eliminating DSPs in receive paths.
• Market Momentum: SiPh penetration in 800G modules is expected to hit 30% by 2025, rising to 50% in 1.6T modules. Coherent's partnerships with NVIDIA and hyperscalers like Amazon ensure it's at the forefront of this shift.
• Margin Resilience: SiPh's higher yields and lower component costs support gross margins of 30–40%, well above the industry average.

Coherent's stock has surged 40% YTD as investors bet on its SiPh dominance. The company's Q2 results, including record orders for 1.6T modules, reinforce its leadership. Risks include competition from rivals like Acelink, but Coherent's end-to-end design-to-manufacturing capabilities are hard to replicate.

Fabrinet: The Manufacturing Maestro

No company better illustrates the supply chain's “hidden heroes” than Fabrinet, the contract manufacturer that assembles and tests optical transceivers for giants like NVIDIA and Coherent. Its advantages are clear:

• Scale and Flexibility: With $833.6M in Q2 revenue (up 17% YoY), Fabrinet is scaling capacity to meet soaring demand. Its $2 million sq. ft. Thailand expansion ensures it can handle telecom and datacom growth.
• Strategic Partnerships: As NVIDIA's sole-sourcing partner for 1.6T transceivers (e.g., Blackwell BG200), Fabrinet is a critical link in the AI supply chain. It also supplies DCI modules to hyperscalers like Google and Amazon.
• Telecom Diversification: Telecom revenue rose 24% YoY in Q2, now accounting for 54% of optical sales, thanks to wins in coherent ZR transceivers and 5G infrastructure.

Fabrinet's stock trades at 22x 2025 EPS—undervalued relative to its 5-year average of 25x. Analysts project $237M in 2026 revenue, with a consensus price target of $269. The catalyst: NVIDIA's Blackwell platform is set to ramp in 2026, driving a V-shaped datacom recovery. Risks include currency fluctuations (Thailand baht strength), but Fabrinet's operational excellence mitigates these.

Investment Thesis: Play the Chain

The optical transceiver market is a supply chain race, and these three companies are the leaders:

1. Lumentum (LITE): Buy on dips. The stock is undervalued at 18x 2025 EPS, and its capacity expansion will pay off as EML shortages ease. Target price: $65 (current: $52).
2. Coherent (COHR): Hold for growth. Its SiPh dominance and NVIDIA ties justify a premium valuation. Target: $300 (current: $210).
3. Fabrinet (FN): Add to portfolio. Its manufacturing scale and telecom diversification offer stability. Target: $275 (current: $237).

Avoid companies overly reliant on EMLs without a SiPh/SiP strategy—like Finisar (now part of II-VI)—which may face margin pressure as the market shifts.

Final Take

The 200G EML shortage is a temporary storm, but it's also a catalyst for innovation and consolidation. Lumentum, Coherent, and Fabrinet are not just surviving—they're redefining the optical landscape. For investors, this trio offers a rare trifecta: scalable growth, technological moats, and valuation upside. In the race to light up the fiber, these companies are the clear winners.