AI Infrastructure Drives Expansion in Custom Chips and Optical Interconnects, While Supply and Execution Timing Remain Key Variables
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AI Infrastructure Drives Expansion in Custom Chips and Optical Interconnects, While Supply and Execution Timing Remain Key Variables
Management discussions indicate continued strengthening demand for data center custom silicon, 1.6T optical upgrades, and cross-data-center interconnects, but capacity, yields, and the timing of CPO/NPO adoption will determine the pace of near- to medium-term realization.
- Qualcomm expects its FY27 data center business to be weighted toward the second half, with custom chip programs potentially contributing the vast majority of revenue; management broadly agrees with revenue guidance of approximately $5 billion.
- Lumentum believes NPO can expand its addressable market, while CPO remains relatively concentrated in the near term; EML order visibility extends through 2028 to 2029, with pricing generally trending upward.
- Applied Optoelectronics' data center growth is constrained by capacity, with robust 800G demand; 1.6T product adoption and capacity expansion are key to gross-margin improvement.
- 650 Group expects the cross-data-center networking market to expand significantly by the end of this decade, with the potential Scale-Across market exceeding $100 billion in the early next decade.
- Early CPO deployments are expected to first be validated at small scale in Scale-Out applications, while NPO is seen as a more pragmatic transition or complementary path due to manufacturing scalability.
Report interpretation
Overview
JPMorgan hosted its 2026 Hardware & Semiconductor Management Access Forum in Palo Alto, covering companies and institutions including Qualcomm, Lumentum, Applied Optoelectronics, Ranovus, Avicena, and 650 Group. Discussions focused on AI-driven data center custom chips, supply and demand for optical modules and lasers, CPO/NPO roadmaps, automotive and industrial IoT, and the evolution of Scale-Up and Scale-Across networking.
Core views
AI infrastructure demand is spreading from compute to interconnects. Qualcomm's custom silicon and connectivity capabilities, Lumentum's lasers and optical components, and Applied Optoelectronics' high-speed optical modules all benefit from the upgrade from 800G to 1.6T and the longer-term evolution toward 3.2T. CPO commercialization is still expected mainly after 2027 to 2028, while NPO can expand applications with lower manufacturing complexity. Cross-data-center interconnects, inference workloads, and persistent machine traffic generated by AI agents provide long-term support for network capital expenditures.
Analysis framework
The report is based on discussions with management teams and investor-relations representatives, combined with 650 Group's industry views on port volumes, network architectures, supply constraints, and market size, to assess demand, technology, and execution variables for companies across the AI hardware and optical interconnect value chain.
Methodology notes
Compare the performance, manufacturing complexity, and adoption timing of CPO, NPO, pluggable optical modules, and emerging micro-LED interconnects.
The report combines architectural differences with customer adoption stages, advanced-packaging constraints, and mass-production capacity to assess short-, medium-, and long-term opportunities across different approaches.
Derive the market opportunity for cross-data-center interconnects from port volumes, transmission distances, and networking equipment configurations.
650 Group uses growth in DCI port volumes and long-distance interconnect demand for coherent optics, amplifiers, and optical line systems to support its view of Scale-Across market expansion.
Assess earnings realization through product generations, gross margins, order visibility, customer concentration, and manufacturing yields.
A higher mix of high-speed products, tight laser supply, and factory expansion capabilities are viewed as key factors affecting revenue and margins.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- US.QCOMBeneficiary of data center custom chips, connectivity chips, automotive chips, and industrial IoT
- Strengths
- Two hyperscaler custom-silicon programs support FY27 revenue; the company has an in-house SerDes roadmap, and its HBC architecture can extend to automotive and edge devices.
- Weaknesses
- Early data center revenue is concentrated in a small number of programs, and full-year revenue is heavily weighted toward the second half.
- Comparison
- Its custom CPU approach emphasizes fully customized cores based on the ARM instruction set, differentiating it from standard ARM cores and other cloud providers' internally developed CPUs.
- Risks
- Uncertainty remains around meeting customer specifications, program mass-production schedules, custom-silicon gross margins, and order realization from Chinese and U.S. hyperscale customers.
- US.LITEBeneficiary of high-speed optical interconnects, lasers, CPO/NPO, and cross-data-center networks
- Strengths
- EML orders and long-term agreements improve revenue visibility; pump-laser share is high, and NPO is expected to expand the addressable market.
- Weaknesses
- The transceiver business still faces manufacturing-yield, automation, and factory-efficiency issues, and margin improvement will require multiple quarters.
- Comparison
- Compared with CPO, which is concentrated among a limited number of customers, NPO covers more customer programs with lower complexity; embedded NPO and ELS are expected to have similar value content.
- Risks
- Delayed CPO/NPO adoption, new industry capacity, transceiver manufacturing execution, and changes in supply from Chinese competitors could affect performance.
- US.AAOIBeneficiary of 800G/1.6T data center optical modules and vertically integrated lasers
- Strengths
- In-house high-power narrow-linewidth laser capabilities, automated assembly, and intellectual property create barriers to entry; 800G demand is strong.
- Weaknesses
- Capacity is the main near-term bottleneck for growth and customer diversification, and customer concentration will remain until expansion is completed.
- Comparison
- Compared with customers manufacturing transceivers internally, the company controls the supply-constrained laser segment; direct laser sales have higher gross margins but lower revenue scale, while ELS module revenue is larger but carries lower gross margins.
- Risks
- Capacity expansion and factory-construction execution, the 1.6T ramp, product-mix changes, customer insourcing, and the timing of CPO adoption could all affect gross margins and revenue.
- US.METACustom CPU customer and AI infrastructure demand driver
- Strengths
- Its custom CPU contract with Qualcomm includes a minimum share commitment, subject to meeting agreed specifications.
- Weaknesses
- The report does not provide specific revenue scale, deployment timing, or final share for the Meta program.
- Comparison
- The program uses a fully customized ARM instruction-set core approach, differing from certain cloud CPU solutions based on standard ARM cores.
- Risks
- Uncertainty remains around meeting specifications, actual adoption share, and the pace of internal infrastructure deployment.
Key data
- Qualcomm FY27 data center revenue guidanceApproximately $5 billionManagement broadly agrees with sell-side expectations for FY27; revenue is expected to be weighted toward the second half and to come mainly from two hyperscaler custom-chip programs.
- Qualcomm custom chip gross marginApproximately 35%Management broadly agrees with expectations for gross margins in the mid-30% range for custom-chip programs.
- Qualcomm industrial IoT pipelineMore than $7 billionDesign wins exceeded $3.5 billion year to date in FY26.
- Lumentum CPO/NPO revenue timing$50 million to $100 million in the fourth quarter of 2026; more than $100 million in the first quarter of 2027Management believes NPO participates in more programs, while the recent demand increase is primarily oriented toward Scale-Up; related contributions are expected after the second half of 2027.
- Lumentum pump laser targetApproximately 4x volume increase by early 2028The company states that its pump-laser share is approximately 80%, with relatively high gross margins within the portfolio.
- Applied Optoelectronics gross margin targetApproximately 35% by mid-2027; potentially approaching 40% over the long termThis depends on a higher mix of 800G and 1.6T products, as well as subsequent CPO opportunities; the 100G and 400G product mix creates pressure.
- Potential Scale-Across market sizeMore than $100 billion in the early next decade650 Group expects DCI port volumes to grow from fewer than 1 million currently to approximately 20 million to 40 million by the end of this decade.
- Scale-Up CPO material crossover timingApproximately 2031The report believes pluggable solutions will remain structurally important throughout this decade.
Impact & implications
For the value chain, the number of custom ASICs is evolving from a single flagship design toward a multi-product portfolio, expanding demand for high-performance silicon, SerDes IP, switching systems, and optical interconnects. Near-term beneficiaries are more likely to include 800G, 1.6T, EMLs, pump lasers, and networking equipment; over the medium to long term, CPO, NPO, and optical interconnects for HBM offer incremental opportunity. Investors need to distinguish between demand strength and actual supply capability, as upside for most companies is currently constrained by capacity, yields, automation, and customer ramp timing.
Risks
- AI data center construction plans may change, resulting in deferred orders for custom chips, optical modules, and networking equipment.
- Capacity, yields, and automation execution for advanced packaging, lasers, optical modules, and factory expansion may fall short of expectations.
- Technical validation and customer adoption of CPO, NPO, 1.6T, and 3.2T products may occur later than expected.
- Customer concentration is high, and purchasing decisions by a small number of hyperscale customers could materially affect revenue.
- New industry capacity, price competition, and changes in China's supply chain may compress margins.
- Alternative technologies such as emerging micro-LED optical interconnects remain at an early stage, and their commercialization scale and economics require further validation.
What to watch
- Qualcomm's meaningful data center revenue beginning in the December 2026 quarter, as well as custom-silicon volume ramping in the second half of FY27.
- Qualcomm's mass production of 1.6T/200G SerDes and R&D progress on 400G SerDes.
- Lumentum's NPO program conversion, EML pricing and order extensions, and transceiver gross-margin ramp.
- Applied Optoelectronics' capacity expansion, 800G volume ramp with its second hyperscale customer, and 1.6T revenue contribution.
- Scale-Out CPO pilot progress in 2027 to 2028, as well as customer adoption of NPO in Scale-Up.
- Whether cross-data-center interconnect ports and demand for coherent optics and optical line systems continue to validate expectations for Scale-Across expansion.
- Whether persistent machine traffic generated by AI agents drives network utilization and bandwidth investment above expectations.