Optical component shares dropped sharply after a June 9 report projected that large-scale deployment of co-packaged optics (CPO) could be delayed until 2028 or 2029, prompting traders to reassess when the technology will generate meaningful revenue.
Applied Optoelectronics fell 14%, while Coherent and Lumentum declined 11% and 8%, respectively. Other companies including AAOI, LITE, COHR, GLW, and MRVL also recorded losses ranging from high single digits to double digits. The move reflects a broader reset in expectations, shifting focus from long-term potential to near-term deliverability.
Timeline uncertainty drives repricing
The report argued that CPO adoption may take longer than previously expected due to engineering and operational challenges. These include issues with production yield, system reliability, and the difficulty of servicing tightly integrated components.
CPO places optical engines closer to ASIC chips, improving bandwidth efficiency and reducing power consumption. However, this integration increases system complexity and raises the cost of failures, since multiple high-value components are combined into a single architecture.
Industry analysis emphasized that distinctions between early production, customer testing, and full-scale manufacturing remain critical. Traders appear to be pricing in delays to mass deployment rather than questioning the long-term viability of the technology.
Competing views on adoption speed
Not all analysts agree on the extended timeline. Technology analyst Serenity pointed to Nvidia’s progress with its Spectrum-X Ethernet Photonics platform and cited several hundred million dollars in new CPO-related orders reported by Lumentum.
According to this view, production could scale between the second half of 2026 and 2028 as Nvidia accelerates traditional hardware development cycles. Nvidia has confirmed that Spectrum-X systems have entered production and are shipping to select partners, with capacity expected to expand in late 2026.
NPO emerges as interim solution
While debate continues around CPO timing, near-packaged optics (NPO) is gaining attention as a transitional approach. NPO positions optical components close to ASICs while maintaining modularity, making systems easier to test, replace, and maintain.
The June report suggested that until CPO challenges are resolved, NPO and pluggable optical modules may remain the preferred choice for hyperscale data center operators seeking lower operational risk.
SemiAnalysis described CPO as a complex integration of previously modular components, noting that current barriers include system design, yield optimization, and maintenance:
- higher integration increases efficiency but complicates repairs
- failures can affect multiple expensive components simultaneously
- manufacturing consistency remains difficult at scale
Strong demand backdrop remains intact
Despite the sell-off, underlying demand for AI infrastructure continues to support the sector. Lumentum and Coherent remain up 125% and 87% year-to-date, respectively, reflecting continued confidence in optical networking demand.
The broader investment case is supported by projections that data center capital expenditures could approach $1 trillion in 2026, driven by AI expansion. Major cloud providers including Amazon, Google, Meta, and Microsoft collectively accounted for roughly $600 billion in data center spending entering the year.
Company results offer key signals
Recent financial results highlight ongoing strength in optical components tied to AI workloads. Lumentum reported fiscal third-quarter revenue of $808.4 million, up 90.1% year-over-year, driven by transceivers and laser chips. The company expects fourth-quarter revenue between $960 million and $1.01 billion, with traders closely watching for signs of CPO contribution.
Coherent reported 41% year-over-year growth in its datacenter and communications segment, which now accounts for 75% of total revenue. Its progress in indium phosphide manufacturing and high-speed component capacity expansion is seen as a key indicator of readiness for both NPO and CPO demand.
Focus shifts to execution data
Attention is increasingly turning to real-world deployment metrics rather than projections. The critical window between 2026 and 2028 is expected to reveal whether early production systems can achieve sustained, large-scale deployment.
Key signals to monitor include supplier revenue breakdowns, gross margins, production volumes, and backlog data. Updates from Nvidia and its partners, along with disclosures from major cloud operators, will help clarify whether CPO remains in pilot stages or transitions into widespread use.
For now, the market reaction underscores a shift toward timeline-based validation, as traders weigh not just which technologies will dominate AI infrastructure, but when that dominance will translate into measurable financial results.
Concerned about shifting AI infrastructure timelines? Explore institutional narratives and price implications in this in-depth market analysis now.
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