A single laser material caps the 1.6T optics boom, despite Lumentum's $451M capex

Lumentum projects $1.25 billion for September, up 24% after $451 million in capex. Indium phosphide laser makers hold the sector’s pricing power.

In August, two leading suppliers of AI datacentre optics forecast strong near-term growth. Lumentum expects $1.25 billion at the midpoint for its September quarter, up 24% from the $1.01 billion it posted in June. Coherent guided to $2.3 billion, roughly 12% over its June quarter.

Demand is not the problem for optical module manufacturers. Their issue is an acute supply shortage in one component: the indium phosphide laser. The shift to 1.6T connections, which transfer 1.6 terabits per second between AI servers, can only move as fast as suppliers can fabricate those lasers.

That constraint gives laser producers pricing power through 2027. In its annual report, Lumentum stated that its operations and those of its clients "are experiencing" supply limits from tight capacity and parts shortages. The company noted that these bottlenecks have "adversely affected" availability, delivery schedules, and expenses.

Revenue is accelerating rapidly. Lumentum generated $480.7 million in the June quarter of 2025 and $1.01 billion twelve months later, according to its results release. That represents more than a twofold increase.

Coherent reflects an identical transition. In its investor deck, datacentre and communications revenue jumped 59% during the same span, moving from $1,018 million to $1,615 million. Its industrial unit dropped 16%. Datacentre and communications now represent 79% of total company revenue, up from 66% the prior year.

The laser is the bottleneck because 1.6T modules require more lasers per unit. Lumentum's 1.6T prototype uses four 400G differential EML lasers, the specific design driving each data lane.

Every finished module needs multiple lasers, each fabricated on an indium phosphide wafer. A shortage of bare wafers or wafer fab capacity restricts module deliveries directly, regardless of heat sink or glass availability.

Industry executives confirm the deficit will take years to resolve. On 6 August, TrendForce News highlighted remarks by Lumentum CEO Michael Hurlston, who observed that the market imbalance in indium phosphide now surpasses that of DRAM and NAND memory. Sector analysts expect the deficit to extend past 2027.

The same article pointed out that China tightened export rules on indium and indium phosphide starting in 2025. China refines about 70% of global indium. The piece also noted that Nvidia allocated $2 billion to each of two primary suppliers in March while securing long-term supply pacts.

Lumentum has poured cash into new infrastructure to address the deficit. During the fiscal year ending 27 June 2026, the company invested $451.3 million in property, plant, and equipment. That is nearly double the $231.0 million spent the previous year. Net property, plant, and equipment grew roughly 60%, climbing from $726.4 million to $1,159.1 million.

Construction in progress totaled $377.4 million, which management plans to commission over the next 12 months. Still, bringing cleanrooms online and tuning wafer yields requires time, and Lumentum documented its supply chain problems using present-tense disclosures.

The Greensboro, North Carolina site that Lumentum acquired in March for $38.0 million in cash provides only a small share of the needed capacity. The purchase included land, physical structures, machinery, and existing staff. The same report indicated that one of the two vendors backed by Nvidia is retooling a 6-inch wafer line, though volume manufacturing will not begin until 2028.

Doubling capital expenditures finances fabrication lines that will arrive only after the 1.6T transition is already running. This lag will keep supplies tight through 2027. It also allows firms with operational laser lines to dictate pricing and contract terms.

Customers are already spending billions to secure fab volume. On 2 March, Nvidia paid Lumentum $2.0 billion, according to Lumentum's annual report. The deal covered approximately 2.9 million shares of Series A convertible preferred stock priced at $695.31 each, providing net cash proceeds of $1,999.7 million.

Coherent received $2 billion from Nvidia for 7,788,161 shares at $256.80 each, as disclosed in an 8-K filing. That filing states the capital will fund research, factory expansions, and Coherent's domestic US manufacturing footprint. Lumentum also noted that it has disbursed cash advances to reserve inventory from its own suppliers, though it has not executed long-term contracts with many of them.

One counterargument suggests that the deficit stems partly from phantom demand, with customers placing duplicate orders to guarantee supply. Under that premise, the squeeze should dissipate as buyers inspect warehouse inventory. Lumentum's cash flow statement shows receivables rose $270.4 million alongside sales, while inventory increased $228.4 million to support manufacturing for market demand. Those figures could support either interpretation.

However, non-refundable prepayments and preferred equity commitments make cancellation costly for buyers. True phantom demand would eventually cause finished lasers to sit uncollected on shelves. A manufacturer projecting a 24% sequential sales increase is not seeing that accumulation.

Silicon photonics, which relocates light generation away from the silicon chip, offers an alternative route. These systems rely on continuous wave lasers and open the door to secondary vendors. Yet a continuous wave laser still requires an indium phosphide substrate, shifting the manufacturing bottleneck to a different component rather than removing it.

Optical module makers face a direct trade-off. Long-term supplier commitments secure guaranteed units, but they lock in price escalations over time and force buyers to take delivery even if datacentre installations slow down. Designing for silicon photonics diversifies the vendor pool, but it brings narrower gross margins.

US cloud providers cannot easily tap emerging Chinese fab capacity. Trade restrictions and a self-contained domestic market keep those producers outside American supply networks.

Lumentum will disclose its September quarter results in November 2026. Hitting or beating the $1.25 billion midpoint will serve as the initial confirmation that laser suppliers retain their pricing leverage. A December quarter forecast above that baseline, delivered in early February 2027, would reinforce it. A revenue miss against the $1.25 billion midpoint would indicate that customer over-ordering caused the run-up.