Maintain Soitec as a Top Pick: Multi-rack AI Interconnects Could Materially Expand Photonics-SOI Content Value

Overview

This report reiterates its Overweight rating on Soitec SA and its designation as a European semiconductor Top Pick. The core thesis is that AI data centers are evolving from traditional pluggable optical modules toward in-rack and cross-rack NPO/CPO optical interconnects, increasing demand and per-GPU content value for Soitec's photonics-SOI wafers. The report believes the market still primarily views the company as a mobile communications play and has not fully reflected the growth and earnings contribution of its photonics business.

Core views

Multi-rack scale-up architecture represents an incremental and relatively near-term growth pathway for the photonics business. Architectures such as NVIDIA Vera Rubin Ultra NVL576 expand the GPU domain through high-speed cross-rack optical connections and can provide a larger memory resource pool and greater workload-scheduling flexibility when HBM capacity per GPU is adjusted. This trend, together with existing demand for pluggable optical modules and the future opportunity to replace in-rack copper interconnects, supports multi-year growth in photonics-SOI. The report expects the increasing revenue mix of higher-margin Photonics-SOI to drive meaningful improvements in gross margin and operating leverage, while supporting valuation convergence toward optical peers.

Analysis framework

The analysis applies the Morgan Stanley ModelWare forecasting framework to model FY27-FY29 revenue, gross profit, earnings, and valuation; it assesses photonics-SOI demand using AI rack topologies, optical-interconnect deployment pathways, and public peer commentary, and determines the target price through relative P/E valuation based on FY29/CY28 expected EPS.

Methodology notes

• Earnings forecasts and relative valuationMorgan Stanley ModelWare

  Segment growth, margin mix, and P/E valuation

  Earnings forecasts are built from growth and margin assumptions for Photonics-SOI, RF-SOI, and other end markets, and valued at 25x FY29/CY28 expected P/E; this multiple is in line with optical-peer levels.

• Scenario analysisRisk-reward framework

  Bull, base, and bear scenarios

  The bull case applies 30x CY28/FY29 expected P/E and assumes a stronger RF-SOI recovery and faster Photonics-SOI growth; the bear case applies 20x P/E and CY28/FY29 EPS assumptions roughly 50% lower.

Asset mapping & comparison

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

• Soitec SA（SOIT.PA）

  Core beneficiary

  Strengths

  Leading position in photonics-SOI substrates; benefits from silicon photonics and high-speed cross-rack interconnects in AI data centers; Photonics margins exceed the group average; operating leverage is available after completion of existing infrastructure investments.

  Weaknesses

  Mobile communications and RF-SOI have historically represented a high share of the business, and the market still views it as a mobile-cycle play; recovery in earnings still requires execution validation.

  Comparison

  FY29/CY28 P/E of about 17x versus roughly 25x for optical peers; the target price uses 25x P/E, reflecting room for valuation convergence.

  Risks

  Weaker-than-expected RF-SOI recovery, slower Photonics-SOI growth, delayed NPO/CPO deployment, impacts from one-off subsidy and tax items, and inconsistent communication of operating metrics.

Key data

• Investment ratingOverweight / Top PickRating maintained.
• Target price€200.00Based on 25x FY29/CY28 expected EPS.
• Closing price€133.202026-08-13.
• Target upside50%Relative to the closing price cited in the report.
• Photonics-SOI growth forecastFY27 175%; FY28 70%FY27 company guidance is for growth of more than 100%.
• Edge & Cloud forecast versus consensus5%/19%/35% above in FY27/FY28/FY29Mainly driven by a more constructive outlook for the photonics business.
• Photonics contribution-margin premiumApproximately 15-20 percentage points above the group averageSupports product-mix improvement.
• Group contribution marginAbout 59% in FY26 → 67% in FY29Driven by a higher Photonics mix and operating leverage.
• Photonics share of contribution profitAbout 55% next fiscal yearThe change in profit mix is more pronounced relative to its FY26 revenue share of only 16%.
• Valuation comparisonSoitec at 17x FY29/CY28 P/E; optical peers at around 25xThe report sees a market-perception and valuation gap.
• FY29 forecastRevenue €1,322m; EBITDA €536m; EPS €7.95Morgan Stanley forecast; fiscal year ending March 2029.

Impact & implications

If NPO begins meaningful deployment from mid-2027 and expands in 2028, the content value and earnings quality of Soitec's photonics-SOI business could improve faster than market expectations. As photonics becomes the main source of contribution profit, the company's valuation framework may shift from that of a mobile/RF-SOI cyclical stock to an AI optical-interconnect beneficiary; however, this re-rating depends on delivery of photonics revenue, RF-SOI destocking, and cash-flow improvement.

Risks

• RF-SOI channel inventory depletion or recovery in mobile-device demand may fall short of expectations.
• Photonics-SOI growth, NPO deployment, or CPO commercialization may progress more slowly than expected.
• Customer adoption of multi-rack AI interconnects may rise more slowly than expected, preventing the 30% penetration assumption from being achieved.
• Fixed costs, R&D investment, or manufacturing execution may fail to translate into the anticipated operating leverage.
• One-off items such as the potential end of an IPCEI subsidy project and a French tax settlement may pressure near-term earnings.
• Inconsistent performance or communication on key KPIs could weaken market confidence in improved execution.

What to watch

• Evidence of declining RF-SOI channel inventory and normalization in the mobile business.
• Photonics-SOI orders, revenue growth, and revenue contribution from pluggable optical modules and NPO.
• Validation of initial NPO deployments from mid-2027 and expanded deployment in 2028.
• Progress in multi-rack scale-up topologies and optical-interconnect solutions from NVIDIA and other AI infrastructure vendors.
• Photonics business margins, group contribution margins, and free-cash-flow improvement.
• Execution on Singapore fab qualification, working-capital management, and positive free cash flow.