Summary in Plain Language
The leading companies in the optical module sector, which had seen soaring prices before, just released their best half-year reports in history—collectively earning 22.3 billion yuan, setting a new record. However, their stock prices plummeted, only to surge by up to 20% within two weeks, making them the most actively traded stocks in the market. This 180-degree turnaround is not due to a change in institutional investment trends but rather because the concerns that had been weighing on the optical module industry (such as CPO (Coherent Photonic Output) technology disrupting existing products, U.S. import bans affecting overseas sales, and AI companies running out of funds for computing power) have been alleviated by Goldman Sachs' upward revision of demand forecasts, as well as Amazon and NVIDIA's massive investments in GPU production.
But the optical module market has now moved beyond the previous scenario where all three companies would rise simultaneously. It has entered a phase of differentiation based on actual capabilities: 90% of the industry's growth over the next three years will come from 1.6T high-speed optical modules. The three companies differ significantly in their technological approaches, market positions, and risk resistance. There is no clear “best stock”; the choice of which company to invest in depends entirely on your assumptions about future market trends.
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Detailed Analysis
1. The Stock Price Reversal in Two Weeks: Not a Market Meltdown, but a Reduction in Concerns
Many people are puzzled by the sudden reversal of stock prices. Why did the companies, which had higher profits, experience such sharp declines and then recover? The reason is that the previous three major concerns have been mitigated:
- The fear that CPO technology would completely replace existing pluggable optical modules has eased. AI server demand is growing so rapidly that even if CPO technology takes a share of the market, the new demand for optical modules exceeds the lost volume. It’s like opening a milk tea shop and fearing that a vending machine next door will steal business, only to find that the street’s foot traffic has tripled, bringing in more customers and more profits.
- The concern about U.S. import bans has also diminished. NVIDIA and Amazon have announced plans to spend billions on GPU production, indicating that they cannot wait for extreme restrictions. If such bans were implemented, U.S. AI development would be halted first.
- The worry that AI companies would cut spending has turned out to be unfounded. NVIDIA has forecasted a 70% increase in revenue next year, exceeding everyone’s previous estimate of 45%. This means that downstream companies are confident about their funding and are urging suppliers to meet their needs.
2. The Optical Module Market is No Longer Uniform: Future Growth Focuses on 1.6T Modules
The optical module market was once a guaranteed winner for all participants, but that’s over. The growth in the next three years will be concentrated in 1.6T modules:
- The growth rate for 800G optical modules is only 2.1%, and prices are expected to drop as competition intensifies. 400G and lower-speed modules are experiencing negative growth.
- In contrast, 1.6T modules have a compound growth rate of 57.6% and represent the only source of growth for the industry. Companies that can produce and sell 1.6T modules in large quantities will continue to thrive, while those that cannot will be eliminated.
- The 1.6T transition is more than just a product upgrade; it involves new technologies like silicon photonics and CPO. This means a shift from traditional to more advanced manufacturing methods, and the industry landscape is being reshaped, eliminating the possibility of all three companies rising together.
3. Competitiveness Among the Three Companies
The three companies are at different stages in developing 1.6T modules:
- Zhongji Xuchuang is the leader, using silicon photonics technology and avoiding the shortage of 200G EML chips. Its silicon photonics chips are already in mass production, and orders for 1.6T modules have been booked until 2027. New products are in high demand, with higher margins than 800G modules.
- Xinyi Sheng is catching up, using traditional technology and starting to see revenue growth in the second half of the year. It has made large upfront payments for chips, ensuring supply.
- Tianfu Communication does not focus on producing finished modules but supplies core components to other manufacturers. While it benefits from the overall market growth, its performance is impacted by chip shortages, especially for 200G EML chips, which affects its production capacity.
4. Long-Term Risks: CPO Technology and U.S. Import Bans
The three companies face different levels of risk from two major concerns:
- CPO technology could replace pluggable modules, potentially affecting Zhongji Xuchuang and Xinyi Sheng’s sales. However, Tianfu Communication’s components are essential in the CPO architecture and may even see increased demand. CPO and import bans are less of a concern for these companies.
- The U.S. import ban mainly affects finished optical modules, but Tianfu Communication’s revenue comes from overseas markets, reducing its vulnerability.
- Xinyi Sheng and Zhongji Xuchuang have a high proportion of overseas sales. Zhongji Xuchuang is on the U.S. Department of Defense’s banned list, which could impact its business if the policy worsens.
5. No Absolute Best Investment
There is no clear “best” company to invest in. The choice depends on your assumptions about future market trends:
- If AI industry growth continues, Zhongji Xuchuang is the best bet due to its stable position, ample orders, and reasonable valuation.
- If you’re cautious about CPO technology or import bans, Tianfu Communication is a safer option.
- In a scenario of market downturn, Xinyi Sheng, with the lowest valuation, is the least vulnerable.
Final Note
All analyses are based on current industry information. The AI industry is rapidly evolving, and geopolitical policies can change quickly. This analysis does not constitute investment advice. Ordinary investors should avoid blindly chasing hot stocks.