AI compute expansion drives upgrades in custom chips and optical interconnects, with NPO serving as an important transition path before CPO volume production
AI summary card
AI compute expansion drives upgrades in custom chips and optical interconnects, with NPO serving as an important transition path before CPO volume production
Key forum topics centered on custom ASICs, 800G/1.6T optical communications, NPO/CPO evolution, and inter-data-center network expansion; industry demand is strong but constrained by capacity and execution capabilities.
- Qualcomm expects approximately $5 billion in FY27 data center revenue, primarily driven by custom chip projects for two hyperscale customers.
- Lumentum believes NPO can expand customer coverage while retaining most CPO benefits, with related demand expected to increase from late 2026 to early 2027.
- Applied Optoelectronics' near-term growth is driven by 800G demand, although data center expansion remains constrained by manufacturing capacity.
- A market research firm expects the long-term inter-data-center networking market to exceed $100 billion in the early part of the next decade, with scale expansion requirements continuing to rise.
- Early CPO deployments are expected to first emerge in scale-out applications, while a meaningful transition in scale-up may not occur until around 2031.
Report interpretation
Overview
JPMorgan hosted its 2026 Hardware & Semiconductor Management Forum in Palo Alto, holding discussions with Qualcomm, Lumentum, Applied Optoelectronics, and private optical technology companies including Ranovus and Avicena, while citing 650 Group's views on the networking market. The report focuses on AI infrastructure-driven demand for custom chips, data center optical interconnects, lasers, network switching, and inter-data-center connectivity.
Core views
Custom ASICs are expanding from a single flagship project into multi-chip portfolios serving training, inference, and varying power and memory requirements, broadening the serviceable market for high-performance semiconductors. In optical interconnects, 800G remains the primary current shipment driver, while 1.6T is set to accelerate in late 2026 through 2027. NPO, given its lower complexity than CPO and greater number of customer touchpoints, is viewed as a pragmatic intermediate technology path. Over the long term, AI inference, distributed data center deployments, and sustained machine traffic driven by agents will support demand for scale-across networks, coherent optics, pump lasers, and optical line systems.
Analysis framework
The report is based on management interviews, industry expert roundtables, and market research perspectives, providing qualitative analysis of product roadmaps, customer adoption, revenue and gross-margin ramps, capacity constraints, technology architectures, and long-term market size.
Methodology notes
Compares the technical complexity, customer coverage, value content, and volume-production timing of co-packaged optics and near-packaged optics.
Management generally believes NPO can achieve most CPO benefits with lower complexity and provide a more manufacturable alternative while advanced packaging capacity remains constrained; CPO retains long-term strategic value.
Assesses revenue and gross-margin upside through speed upgrades, laser supply, manufacturing yields, and customer concentration.
800G, 1.6T, and high-power narrow-linewidth lasers support product-mix improvement, but actual realization depends on capacity expansion, automation, yields, and supply-chain execution.
Assesses the impact of AI workloads, inter-data-center connectivity, and growth in custom ASIC deployments on the serviceable market.
650 Group expects the scale-across market to exceed $100 billion in the early part of the next decade; multi-ASIC deployments and higher networking bandwidth demand are key supports.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- US.QCOMBeneficiary of custom data center chips, CPUs, connectivity IP, automotive, and industrial IoT
- Strengths
- Two hyperscale customer custom-chip projects support FY27 data center revenue growth; the company has an internal SerDes roadmap and is exploring more energy-efficient memory architectures through HBC.
- Weaknesses
- Data center revenue is highly dependent on a small number of custom projects; whether custom-chip margins remain below some higher-margin businesses requires continued monitoring.
- Comparison
- Custom CPUs use fully customized cores based on the ARM instruction set, differing from standard ARM-core approaches; the automotive Gen 5 platform competes with NVIDIA Thor and domestic Chinese solutions.
- Risks
- Meeting customer specifications, project volume-production timing, hyperscale customer concentration, custom-chip competition, and automotive platform competition.
- US.LITEDirect beneficiary of data center optical interconnects, lasers, NPO/CPO, and inter-data-center networking demand
- Strengths
- Broader NPO customer opportunities; extended EML order visibility; higher pump-laser share and margins; and expanding long-term agreement coverage.
- Weaknesses
- TRx gross-margin improvement requires multiple quarters of manufacturing ramp-up and is constrained by yields, automation, and factory efficiency.
- Comparison
- NPO is less complex than CPO while retaining most benefits; the value content of embedded NPO could approach that of ELS solutions, but volume production is later.
- Risks
- Capacity additions, intensifying competition, limited visibility into China's supply chain, TRx manufacturing execution, and delayed realization of scale-up demand.
- US.AAOIBeneficiary of 800G/1.6T optical module and high-power laser demand
- Strengths
- Vertically integrated high-power narrow-linewidth laser capabilities, automated optical module assembly, and intellectual property help establish competitive barriers.
- Weaknesses
- Data center business expansion is constrained by manufacturing capacity, making it difficult to reduce near-term customer concentration quickly.
- Comparison
- The company views NPO as an incremental opportunity alongside the CPO roadmap; 800G is the near-term mainstay, while 1.6T is expected to begin contributing in 4Q26 and expand in early 2027.
- Risks
- Capacity expansion and new-factory execution, yields, customer concentration, product-mix changes, customer in-house optical module strategies, and CPO adoption timing.
- US.METAHyperscale customer for Qualcomm's custom CPU project
- Strengths
- The contract includes minimum share commitments contingent on meeting specifications, potentially providing Qualcomm with a relatively certain project foundation.
- Weaknesses
- The report does not disclose project size, specific volume-production timing, or Meta's ultimate external supplier sourcing share.
- Comparison
- This CPU project differs from other cloud in-house chip programs based on the ARM ecosystem by emphasizing fully customized core design.
- Risks
- Meeting specifications, deployment progress, actual purchasing above the minimum share, and changes in Meta's internal technology roadmap.
Key data
- Qualcomm FY27 data center revenue guidanceApproximately $5 billionManagement broadly agreed with sell-side expectations for $500 million to $600 million in revenue in the December quarter, with FY27 revenue primarily coming from two hyperscale customer custom-chip projects.
- Qualcomm custom-chip gross marginApproximately 35%Management broadly agreed with expectations that custom-chip projects would generate gross margins in the mid-30% range.
- Qualcomm industrial IoT pipelineMore than $7 billionYear-to-date FY26 design wins exceed $3.5 billion, spanning retail, warehousing, manufacturing, and oil and gas applications.
- Lumentum CPO/NPO-related revenue cadence$50 million to $100 million in 4Q26; over $100 million in 1Q27Management believes the recent demand increase is more weighted toward scale-up, with this revenue contribution expected after 2H27.
- Lumentum pump-laser targetFourfold unit-volume growth by early 2028The company stated that its pump-laser share is approximately 80%, and that these products carry relatively high margins within its portfolio.
- Applied Optoelectronics gross-margin targetApproximately 35% by mid-2027; subsequent CPO could support approximately 40%Improved 800G and 1.6T product mix is the main driver, while 100G and 400G are relative drags.
- Long-term scale-across market sizeMore than $100 billion in the early part of the next decade650 Group expects data center interconnect ports to grow from fewer than 1 million currently to approximately 20 million to 40 million.
- Potential timing for a meaningful CPO transition in scale-upAround 2031Early CPO is expected to be deployed first at limited scale in scale-out applications, while pluggable solutions remain important during this decade.
Impact & implications
For the supply chain, AI infrastructure investment is expanding beyond compute chips into high-speed connectivity, optical engines, lasers, switching, and routing equipment. Vendors with capabilities in high-power lasers, automated manufacturing, advanced packaging, SerDes IP, or custom-chip design may benefit from higher value content. Near-term investment assessments need to distinguish demand strength from delivery capability: amid tight capacity, yield ramps, and customer concentration, order growth may not necessarily convert simultaneously into revenue and profit.
Risks
- AI infrastructure capital expenditure or customer deployment schedules fall below expectations.
- High-power laser, advanced packaging, and optical module manufacturing capacity cannot expand as planned.
- Customer adoption of CPO, NPO, 1.6T, and 3.2T technology paths is delayed or standards change.
- Optical module manufacturing yields, automation, and factory-efficiency improvements fall short of expectations.
- Order concentration, pricing pressure, and project-cancellation risks associated with a small number of hyperscale customers.
- Increased supply, pricing pressure, or technological catch-up from Chinese and global competitors.
- Intensifying competition in custom ASICs, automotive computing platforms, and networking equipment markets.
What to watch
- Qualcomm's data center revenue delivery in the December quarter and FY27, customer adoption of its two custom-chip projects, and gross-margin performance.
- Qualcomm Gen 5 automotive platform shipments, adoption by Chinese automakers, and the conversion of industrial IoT design wins into revenue.
- Lumentum NPO/CPO orders, EML long-term agreement renewals, pump-laser capacity expansion, and TRx gross-margin improvement.
- Applied Optoelectronics' 800G/1.6T capacity ramp, ramp-up of a second hyperscale customer, and its medium-term gross-margin path.
- Early CPO deployment volumes in scale-out applications and NPO validation progress among potential customers including Amazon, Nvidia, and Broadcom.
- Whether inter-data-center network ports, coherent optics, optical line systems, and routing/switching equipment orders continue rising with AI inference demand.
- Whether agent-driven machine-to-machine traffic creates a sustained incremental bandwidth demand.