Reasonable Valuation of the Optical Module Sector

The optical module sector is experiencing strong growth driven by AI datacenter demand, but valuations are stretched, with upstream suppliers capturing the majority of profits while assemblers remain price-takers.

Market Size and Growth

The optical module market is expanding rapidly due to AI-driven datacenter build-outs. Goldman Sachs projects 800G module sales to reach 33.5 million units in 2026, with the total market value growing from $12.73 billion in 2025 to $19.37 billion in 2026, representing strong year-on-year growth of over 50% in USD terms . Cignal AI reports that datacom optical component revenue more than doubled in 1Q26 to $7.7 billion, with 800GbE modules dominating high-speed shipments and 1.6TbE modules ramping sharply . Despite this growth, supply constraints in EML lasers and DSP chips limit the ceiling for expansion .

Profit Distribution and Scarcity Rent

Not all players benefit equally. Chinese assemblers like InnoLight and Eoptolink capture the majority of unit volume (~60% of Nvidia's incremental 800G orders) but earn 20–38% net margins as price-takers . In contrast, upstream suppliers of scarce components, such as Lumentum (EML lasers) and the Broadcom/Marvell DSP duopoly, enjoy durable pricing power and higher margins (Broadcom's gross margin ~68%) due to limited competition . This decoupling of volume share and profit share is critical for valuation analysis.

Valuation Considerations

1. Upstream “picks-and-shovels” layer: Companies controlling scarce inputs (EML lasers, DSPs) are more defensible and can justify higher valuations due to pricing power and structural scarcity .
2. High-beta assemblers: Fast-growing Chinese assemblers offer exposure to volume growth but are more cyclical and sensitive to pricing pressures, suggesting lower relative valuations .
3. CPO and next-generation optics: Co-packaged optics (CPO) adoption will influence mid-term valuations, but near-term earnings remain concentrated in pluggable modules .

Current Market Sentiment

After a strong rally (60%+ in A-share optical modules), the sector experienced a valuation reset, reflecting a timing correction rather than a fundamental decline . Analysts emphasize that the next wave of orders (2027–2028) will be pivotal in determining whether valuations remain justified.

Reasonable Valuation Framework

• Price-to-earnings (P/E) ratios: For upstream suppliers with durable scarcity rent, P/E multiples can remain elevated due to high margins and predictable demand. For assemblers, P/E ratios should be more conservative, reflecting cyclical margins and competitive pressures .
• Revenue growth alignment: Valuations should consider the deceleration in growth (AI optical module market growth slowing from +93% in 2024 to +57% in 2026) and supply constraints .
• Investment strategy: Favor upstream suppliers for stable returns, use high-growth assemblers for beta exposure, and monitor CPO adoption as a structural variable for the next 3–5 years . In summary, reasonable valuations in the optical module sector depend heavily on the company's position in the value chain. Upstream suppliers with scarce components justify higher multiples, while assemblers should be valued more conservatively, reflecting lower margins and cyclical risk. Investors should also account for AI-driven demand growth, supply constraints, and the timing of next-generation optics adoption.