CPO Concerns Lead to Mispricing of Fiber Stocks; J.P. Morgan Reiterates Overweight
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CPO Concerns Lead to Mispricing of Fiber Stocks; J.P. Morgan Reiterates Overweight
J.P. Morgan believes market fears over CPO delays are excessive. Coherent and Lumentum valuations have fallen to PEG<1 levels; the firm reiterates Overweight ratings and views the pullback as a buying opportunity.
- Optical communication stocks corrected nearly 20% from early June highs, far underperforming the broader market
- Channel checks indicate Nvidia's CPO mass production progress is in line with or better than expectations
- Current CY28 P/E for COHR and LITE is approximately 25x, implying a PEG ratio below 1x
- Regardless of whether customers choose NPO or CPO solutions, the content value proposition for laser suppliers remains stable
- Listing of Chinese manufacturers on the Pentagon's list could accelerate supply chain shifts by US clients
- Reiterate Overweight rating on Coherent (COHR) and Lumentum (LITE)
Report interpretation
Overview
J.P. Morgan issued a review on the hardware and networking sector, analyzing the significant correction in the optical communications sector driven by concerns over delayed implementation of CPO (Co-packaged Optics). The core conclusion is that the market reaction was excessive. Based on recent supply chain checks, Nvidia's CPO mass production progress is smooth and potentially better than expected. With stock prices correcting, valuations for Coherent (COHR) and Lumentum (LITE) have entered an extremely attractive range. Consequently, the institution re-issued its Overweight rating for both companies, viewing this sell-off as a buying opportunity.
Core views
Regarding CPO Mass Production Progress and Market Sentiment: Stock prices for optical communication vendors fell nearly 20% from early June highs (while the S&P 500 dropped only 5%), driven by a lack of summer catalysts and fears of delayed CPO adoption. However, through exchanges with key vendors and feedback from the Computex exhibition, J.P. Morgan confirmed that Nvidia's tracking for Scale-out CPO mass production in the second half of 2026 is better than expected. Lumentum noted that switches supporting CPO now account for over 50% (previously expected at 40%-50%), with demand expanding from Tier 2 clients and Neoclouds to select hyperscale cloud providers. Nvidia is actively seeking additional InP capacity, and Lumentum even hinted that planning for a sixth wafer fab might be needed before current new factories come online. Regarding Technology Routes and Content Value: Addressing investor concerns that NPO (Near-packaged Optics) solutions delaying CPO adoption would negatively impact suppliers, the report argues the impact is limited. Regardless of whether customers ultimately choose NPO or CPO solutions, the content opportunity for laser suppliers will remain robust. The real key variable is the adoption pace of Scale-up networks. Inter-rack and intra-rack opportunities expected from 2028 onwards remain unchanged, providing the supply chain sufficient time to resolve potential yield issues in early low-volume deployments. Regarding Valuation Attractiveness and Geopolitical Catalysts: Following this adjustment, the average trading multiple for Coherent and Lumentum is only around 25x the CY28 consensus earnings estimate (buyer expectations may be lower). Considering earnings growth forecasts of over 40%, the implied PEG ratio is below 1x, significantly lower than valuation multiples investors are currently willing to pay. Furthermore, the US Department of Defense added Chinese optical module manufacturers Innolight and Eoptolink to the 1260H list. While direct impacts are limited, this may trigger second-order effects, prompting US hyperscale cloud providers to accelerate order transfers to vertically integrated US firms like Coherent and Lumentum to mitigate supply chain risks, constituting potential tailwinds for TRx (Transceiver) demand.
Analysis framework
The report adopts an 'Expectation Gap Verification + Valuation Anchoring' analytical framework. First, it validates whether the market's pessimistic assumption regarding 'CPO delays' holds true using first-party channel checks and exhibition feedback, thereby identifying divergences between fundamentals and stock prices. Second, it anchors valuations using the PEG metric combined with forward (CY28) earnings growth rates to determine if current prices offer a margin of safety in high-growth sectors. Finally, it introduces geopolitical events as supply-side disturbance factors to analyze their potential reshaping effect on competitive landscapes and second-order demand, constructing a multi-factor bull case based on 'unchanged fundamentals + falling valuations + potential catalysts'.
Methodology notes
Application of PEG Ratio in High-Growth Stocks
The report derives the conclusion PEG<1 by dividing the forward CY28 P/E by the earnings growth rate. For high-growth tech hardware companies, looking solely at static P/E often leads to distortion; PEG better measures whether the 'price paid for growth' is reasonable, with values below 1 typically viewed as signals of undervaluation.
Supply Chain Check Verification Method (Channel Checks)
When markets disagree on the implementation timeline of new technologies (such as CPO), directly surveying upstream core component suppliers regarding production schedules, capital expenditure intentions, and actual purchasing behavior from downstream clients can capture true fundamental inflection points earlier than relying solely on public guidance.
Opportunity to Correct Excessively Pessimistic Expectations
The report states that the stock price decline stems from 'exaggerated concerns', which is a typical expectation gap trading logic. When market prices have already factored in extremely pessimistic assumptions (e.g., complete failure or significant delay of CPO), while the actual situation involves only timing adjustments or smooth progress, the elasticity of valuation repair often exceeds the improvement of fundamentals itself.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- Coherent Corp (COHR.US)Core Beneficiary: Stable CPO/NPO laser content volume, and benefits from supply chain de-risking as a US-based vertically integrated manufacturer
- Strengths
- Strong vertical integration; product lines cover TRx, DCI, EMLs, and more; valuations pulled back to relative historical lows
- Comparison
- Along with Lumentum, belongs to the first tier, both enjoying PEG<1 valuation advantages
- Risks
- CPO mass production progress fails to meet expectations; macroeconomic slowdown leads to reduced capex by cloud providers
- Lumentum Holdings Inc (LITE.US)Core Beneficiary: Key Nvidia CPO supplier; aggressive InP capacity expansion; stands to gain ELS orders from non-Nvidia clients
- Strengths
- CPO switch share increased to >50%; planning a sixth wafer fab to meet demand; expected to win turnkey solution orders from non-Nvidia clients soon
- Comparison
- Share increase in specific CPO components is slightly faster than peers
- Risks
- Yield and cost pressures during new factory ramp-up; relatively high dependency on single customer
Key data
- Stock Price Pullback Magnitude-20%Decline of optical communication stocks from early June highs; S&P 500 declined only 5% during the same period
- CPO Switch Share>50%Lumentum revealed trends in Nvidia-supported CPO switch ratios, exceeding the previous 40-50% expectation
- Forward Valuation Level~25x CY28E P/EAverage trading multiple for Coherent and Lumentum, implying PEG<1 against >40% growth
- Earnings Growth Expectation>40%Core growth assumption supporting current valuation attractiveness
Impact & implications
For the optical communications sector, this implies that the recent sell-off was largely a mismatch of sentiment and capital flows rather than a reversal of industry trends. For Coherent and Lumentum, apart from core AI/CPO businesses, traditional telecommunications, data center interconnects (DCI), and EML laser businesses still provide upside options. Geopolitical factors may serve as an asymmetric positive catalyst, accelerating certification and adoption of local supply chains by major North American clients. The report suggests investors use the current valuation trough to position themselves and monitor the impact of H2 2026 CPO shipment data on stock price recovery.
Risks
- CPO technology encounters unforeseen yield or engineering bottlenecks during large-scale deployment
- AI infrastructure investment returns fail to meet expectations, leading cloud providers to cut capital expenditures
- NPO solutions replace CPO solutions faster than expected, creating an order vacuum during the transition period
- Geopolitical shifts cause supply chain restructuring costs to exceed expectations
What to watch
- Actual shipment data and yield feedback for Nvidia CPO in 2H26
- Official announcement and timeline for Lumentum's sixth wafer fab
- Progress on NPO/CPO wins from non-Nvidia clients (hyperscale cloud providers/chip makers)
- Subsequent policy enforcement力度 by the US Department of Defense regarding the 1260H list and its actual impact on supply chain procurement