Lumentum (LITE) is expected to trade at a forward P/E of 49.3x in 2027, compared to Coherent (COHR) at 32.9x, widening the valuation gap. Investors are deeply divided on the commercialization timeline for co-packaged optics (CPO). Bernstein argues that CPO delay risk is overpriced, and near-packaged optics (NPO) may serve as a viable alternative, maintaining outperform ratings for both companies.

In its October 12, 2026 report, Bernstein noted that long-term investors remain largely on the sidelines toward photonics module firms, while hedge funds are engaged in intense debate over CPO versus NPO. Large-scale CPO production by 2028 remains uncertain; NPO could be ready by 2027. Asian competition is intensifying, but technological moats remain intact.

Long-Term Investors Still on Sidelines

Feedback from long-term investors leans toward foundational investor education, indicating most hold no positions or only index-weighted exposure. They lack strong convictions on Lumentum and Coherent, expressing frustration over difficulty in building confidence.

Some investors are dissatisfied with Lumentum’s communication approach. One investor criticized Lumentum for updating guidance during bank meetings rather than at company events—a practice deemed inappropriate. Others argue this method may favor investors who trade more frequently around bank presentations, potentially skewing the investor base toward short-term capital.

CPO Commercialization Timeline in Doubt

Hedge fund conventional narratives center on scale-up optics enabling the next growth phase, with CPO timing being pivotal. Investor confidence in large-scale CPO production by 2028 is weak. Asian supply chain checks indicate Foxconn produced 10k CPO switches in Q4 2026, with plans for 30k in 2027. Assuming $500 per unit, CPO would contribute roughly 2% to 2026 revenue, with 2027 volume even below annualized run-rate levels.

CPO manufacturing challenges stem from fiber alignment. Fibers have low melting points and cannot withstand soldering heat, requiring post-assembly connection. A single misaligned fiber can render an entire optical engine non-functional. NPO addresses this via plug-in fiber connections—fibers can be tested before insertion into the optical engine, ensuring assembly is completed using known-good engines.

NPO Emerges as Viable Alternative

Investors are growing increasingly confident in NPO as a fallback option for scale-up optics. NPO could be production-ready by 2027. If CPO delays persist, NPO may provide a sufficient substitute.

Concerns arise over the use of vertical-cavity surface-emitting lasers (VCSELs) or microLEDs in scale-up NPO potentially eroding Lumentum and Coherent’s technological edge. Their dominance in high-power lasers is considered the deepest moat. Low-power VCSELs or microLEDs may suffice for scale-up NPO applications. Asokan Seyedi’s move from NVIDIA to AMD-OSRAM is seen as validation of AMD-OSRAM’s microLED approach. Investors worry that shifting to low-power lasers for scale-up optics could diminish the relevance of Lumentum and Coherent’s high-power laser expertise.

Asian Competition Adds Uncertainty

Asian investors highlight intensifying competition, particularly from China. CW lasers may face oversupply. U.S. investors believe regulatory moats exist, as U.S. government is unlikely to permit imports of Chinese-made lasers. Others counter that even if Chinese manufacturers cannot export to the U.S., import substitution and potential exports to non-U.S. markets will still negatively impact industry supply-demand balance.

Optical circuit switching (OCS) also draws interest. Bernstein estimates the market at ~$600 million, though it lacks conviction on growth trajectory. OCS is not a true replacement for traditional switching and requires complete rearchitecting of rack infrastructure. Despite clear interest and experimentation, Bernstein remains uncertain whether other participants will invest in such fundamental rack redesigns, and doubts OCS’s growth path.

Outperform Ratings Maintained for Both

Lumentum is viewed as a stronger company than Coherent, with clearer technological leadership. Debate persists over Lumentum’s 2028 EPS, with some arguing $40 is a ceiling, while others see a path to $55. The widening valuation gap has led some investors to shift toward long positions in Coherent, moving away from Lumentum.

Bernstein updates its 2028 fiscal year and beyond estimates for both companies, maintaining outperform ratings. Target price: Lumentum $1,220, Coherent $350. Lumentum’s 2027 expected EPS is $22.40, implying a P/E of 49.3x. Coherent’s 2027 expected EPS is $9.51, at a P/E of 32.9x. Bernstein sees favorable risk-reward dynamics, with high probability of upside surprises and upgrades in the coming quarters. Technical debates are unlikely to shift before OFC, which historically serves as a positive catalyst for the subsector.

Disclaimer

This article is a synthesis and interpretation by ChaoXiang Research of a third-party brokerage report (Bernstein, October 12, 2026), incorporating publicly available market information. All ratings, target prices, earnings forecasts, and related assessments cited herein represent the views of the analyst at the originating brokerage firm, reflect the institutional position of the firm, and do not constitute ChaoXiang Research’s opinion or any investment advice.

Markets involve risk; decisions must be made independently. This article should not be used as a basis for buying or selling any securities.

Written by: Rita