Multi-rack AI interconnects open a new growth avenue for Photonics-SOI; Soitec’s valuation discount could narrow

Overview

The report argues that Soitec, given the critical position of its Photonics-SOI substrates in the silicon-photonics value chain, will benefit from AI data-center optical-interconnect upgrades. Beyond growth in traditional pluggable optical modules and the evolution of in-rack CPO, NPO/CPO connections for multi-rack scaling are creating a more near-term source of incremental demand, while the market has yet to fully price in improvements in its earnings mix and a valuation rerating.

Core views

The core view is that multi-rack AI clusters require high-speed optical links at distances where copper interconnects are no longer viable, increasing the content value of Soitec’s Photonics-SOI. Analysts expect the high growth and high margins of Photonics-SOI to materially improve the group profit mix: although RF-SOI still accounts for 32% of FY26 revenue and Photonics-SOI only 16%, photonics could contribute around 55% of contribution profit in the next fiscal year. The market still sees the company as a mobile-business play rather than an optical-network beneficiary, therefore assigning around 17x FY29/CY28e P/E, below approximately 25x for optical-interconnect peers.

Analysis framework

The report draws on AI rack topology, industry-company commentary on the timing of NPO/CPO deployment, comparisons between company segment forecasts and market consensus, and relative P/E valuation based on CY28e/FY29 earnings.

Methodology notes

• Research ModelMorgan Stanley ModelWare

  Financial Forecasting Framework

  Unless otherwise stated, financial metrics in the report are based on the Morgan Stanley ModelWare framework.

• Valuation methodsRelative P/E Valuation

  CY28e/FY29e P/E

  A 25x P/E multiple is applied to FY29 earnings per share, corresponding to CY28e, to derive the €200 target price, and this is compared with approximately 25x P/E for optical-interconnect peers.

• Scenario AnalysisBull/Base/Bear Scenarios

  Risk-Reward Framework

  The bull case applies a 30x CY28/FY29 P/E multiple and implies €300 fair value; the bear case uses lower earnings forecasts and a 20x P/E multiple, implying €80 fair value.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Soitec SA（SOIT.PA）

  Direct beneficiary of expanding silicon-photonics and optical-interconnect demand from AI data centers

  Strengths

  Photonics-SOI substrates occupy a critical position in silicon-photonics modules; the company can benefit through multiple demand pathways, including pluggable modules, NPO, and CPO; photonics margins exceed the group average.

  Weaknesses

  RF-SOI and mobile-device-related businesses still affect the revenue mix and market perception; current photonics volume growth remains dependent on industry deployment materializing.

  Comparison

  The company’s approximately 17x FY29/CY28e P/E is below around 25x for optical-interconnect peers, and analysts see room for the valuation discount to narrow.

  Risks

  A weaker-than-expected RF-SOI recovery, slower Photonics-SOI growth, delayed NPO/CPO deployment or lower-than-expected scale, and weaker-than-expected operational execution and working-capital improvement.

Key data

• Investment RatingOverweight; Top PickRating reiterated.
• Target Price€200.00Based on 25x CY28e/FY29e P/E.
• Closing Price€133.202026-08-13.
• Implied Upside50%Relative to the closing price stated in the report.
• Photonics-SOI Growth ForecastFY27 175%; FY28 70%FY27 company guidance is “more than doubling.”
• Edge & Cloud Forecast Versus Consensus1%/5%/16% above consensus in FY27-29Based on the updated forecast methodology in the report body.
• Photonics Margin AdvantageAround 15-20 percentage points above the group averageDrives improvement in the earnings mix.
• Group Contribution MarginAround 59% in FY26 → 67% in FY29Driven by photonics mix and operating leverage.
• FY29/CY28e P/EAround 17xThe report considers this below approximately 25x for optical-interconnect peers.
• FY29e Revenue and EPSRevenue €1,322m; EPS €7.95Morgan Stanley forecast; fiscal year ending March 2029.

Impact & implications

If NPO deployment in multi-rack AI scaling begins from mid-2027 and expands in 2028, Soitec’s Photonics-SOI revenue and profit growth could outpace market expectations. A rising mix of higher-margin businesses, operating leverage from largely completed prior infrastructure investment, and a shift in investor perception from a mobile business to an optical-network business form the main path to achieving the target price.

Risks

• RF-SOI channel inventory digestion and end-demand improvement may fall short of expectations.
• Photonics-SOI growth, NPO/CPO penetration, or the pace of multi-rack AI deployment may be below expectations.
• The company may communicate key KPIs inconsistently, or improvements in its Singapore plant and working-capital management may not be sustained.
• The potential end of the IPCEI subsidy program could create an approximately €30m gross-profit headwind, while settlement of a long-running French tax dispute is expected to have an approximately €60m impact.
• The market may continue valuing the company as a mobile/analog semiconductor business rather than an optical-interconnect business, resulting in a weaker-than-expected valuation rerating.

What to watch

• Customer validation, volume production, and order progress for NPO multi-rack deployments from mid-2027 through 2028.
• Whether Photonics-SOI revenue growth approaches the FY27 175% and FY28 70% forecasts.
• Whether Edge & Cloud revenue and gross profit continue to exceed market consensus.
• Whether Photonics contribution profit increases toward the approximately 55% target for the next fiscal year.
• RF-SOI channel inventory digestion, recovery in the mobile business, and automotive-business performance.
• A return to positive free cash flow, working-capital management, and operational improvements at the Singapore plant.