J.P. Morgan: Strong optical communications demand; Coherent and Fabrinet favored ahead of earnings

Why do capacity and product mix still matter amid strong demand?

JPMorgan’s intra-quarter research indicates that optical communications demand could remain strong through the end of 2026 and into 2027, while long-term agreements extend demand visibility into 2028 and beyond.
Beyond growth in optical transceivers and lasers, higher-margin data center interconnect (DCI), optical circuit switching (OCS), and co-packaged or near-packaged optics (CPO/NPO) are expected to contribute progressively more to revenue and profit each quarter.
The conversion of demand into earnings upside depends partly on capacity expansion for products such as indium phosphide lasers. The ramp-up of 1.6T optical modules also faces constraints in lasers and digital signal processing chips, while the extent of improvements in pricing and gross margin is another key factor.

The bank expects new indium phosphide capacity to unlock optical module revenue, driving year-on-year growth of more than 80% in Coherent’s data center revenue for the first quarter of fiscal 2027, ended at the end of September 2026, above its previous forecast of 80%.
JPMorgan expects total revenue of 2.39 billion dollars for the quarter, above the market consensus of 2.311 billion dollars, and earnings per share of 2.08 dollars, above the consensus of 2.01 dollars. As the incremental revenue comes mainly from lower-gross-margin optical modules, room for gross margin improvement may be limited.
Coherent’s share price at the time implied a multiple of 12 times expected calendar-year 2028 earnings, the lowest in the group. Although it was the bank’s preferred stock ahead of earnings, the bank cut its December 2027 price target from 465 dollars to 385 dollars because it applied a lower target valuation multiple, while maintaining an overweight rating.

JPMorgan expects Fabrinet’s revenue growth in fiscal 2027 to exceed that of fiscal 2026. Nvidia optical modules have begun shipping with lasers from multiple suppliers, and the transition to a next-generation solution for AWS’s high-performance computing business is also largely complete, creating a larger business opportunity.
AWS optical modules are expected to ramp up significantly over the next few quarters; OCS, multi-rail and CPO/NPO projects could follow later in the fiscal year and contribute more noticeably in fiscal 2028. The bank expects gross margin to bottom in the first quarter of fiscal 2027 and improve sequentially thereafter.
New segment disclosures may limit investors’ visibility into specific projects. JPMorgan lowered its December 2027 price target from 695 dollars to 465 dollars and maintained a neutral rating; the share price at the time implied 14 times expected calendar-year 2028 earnings.

JPMorgan expects Lumentum’s revenue for the first quarter of fiscal 2027, ended at the end of September 2026, to be 1.273 billion dollars, above the market consensus of 1.256 billion dollars; earnings per share are expected to be 4.29 dollars, above the consensus of 4.21 dollars. The bank also expects the next quarter’s revenue and earnings outlook to exceed consensus.
But Lumentum’s share price at the time implied 21 times expected calendar-year 2028 earnings, substantially higher than the other two; the bank observed that buy-side expectations for 2028 earnings were also well above sell-side consensus, so investors may scrutinize the quality of growth even if results and guidance exceed expectations.
Near-term incremental revenue may come more from data communications lasers, DCI and optical modules; if lower-gross-margin optical modules account for a greater share, overall gross margin performance may be weaker than in recent quarters. JPMorgan maintained its overweight rating and its December 2027 price target of 1,280 dollars.