Goldman Sachs: Innolight’s third-quarter revenue growth accelerates, but Goldman Sachs cuts earnings forecasts: Supply constraints offset some AI demand

Why did growth accelerate in the third quarter?

Innolight’s revenue in the third quarter of 2026 was 27.769 billion yuan, up 25% quarter over quarter, faster than the 14% recorded in the second quarter. Gross margin rose to 46.6% from 46.4% in the second quarter.
Goldman Sachs attributed the company’s growth despite raw-material shortages and the impact of flooding in Thailand to strong end demand, its ability to secure raw materials relatively well thanks to its market position, and its execution capability.
Flooding delayed some shipments. These products were shipped in October and recorded as fourth-quarter revenue. Goldman Sachs therefore expects fourth-quarter revenue to rise 27% quarter over quarter, supported by both demand from new AI server racks and revenue delayed from the previous quarter.

Goldman Sachs lowered its revenue forecasts for 2026–2028 by 20%, 10% and 7%, respectively, mainly reflecting tight component supplies. It cut its net profit forecasts for the same years to 33.467 billion yuan, 82.123 billion yuan and 129.61 billion yuan, respectively.
Even after the cuts, Goldman Sachs expects revenue to rise 136% and 57% year over year in 2027 and 2028, respectively. Its view depends on new AI racks driving a ramp-up in 1.6T optical modules and raw-material supplies improving each quarter.
Goldman Sachs’ 2027 net profit forecast remains 25% above the Bloomberg consensus. Its assessment is based on its positive view of AI spending, the company’s ability to procure raw materials, and its market share in high-speed connectivity.

Goldman Sachs expects gross margin to edge up from 46.6% in the third quarter of 2026 to 46.7% in the fourth quarter, and reach 50.2% in 2028.
The driver is a product mix shift toward optical modules based on continuous-wave lasers (CW). According to Goldman Sachs’ comparison, these products have lower average selling prices but higher gross margins than EML-based optical modules, so revenue growth and gross margin changes do not necessarily move in step.

Goldman Sachs maintained its Buy ratings on the A and H shares, but cut its 12-month A-share price target from 2645 yuan to 2405 yuan and its H-share target from HK$3267 to HK$2829.
The target price-to-earnings multiple for the A shares fell from 35.6 times to 34.5 times forecast 2027 earnings. Goldman Sachs attributed the valuation cut to a contraction in industry valuations, amid concerns about possible U.S. restrictions on Chinese optical modules and the sustainability of AI spending.
The bank sees the ramp-up of 1.6T products, progress on new products such as 2.4T and 3.2T, and greater clarity on AI spending and policies related to Chinese suppliers as potential catalysts for a valuation re-rating. Conversely, weaker-than-expected demand or new-product ramp-ups, a faster decline in market share, and deteriorating component supplies could constrain growth.