Citi: US Communication EquipmentMarket Overview: I

Citi: US Communication Equipment

Market Overview: InP Supply Constraints

> Persistent Supply Gap: Despite rapid capacity increases, InP supply is expected to remain below demand for the next three years.

> Strategic Importance: InP is a critical bottleneck in the AI infrastructure buildout, as it is the semiconductor substrate used for high-speed laser diodes in 800G and 1.6T optical transceivers.

> Supply-Demand Model: Citi projects a significant demand gap for EML lasers, estimated at 30% in 2026, narrowing to 20% in 2027 and 11% in 2028.

> 6-Inch Wafer Transition: The transition to 6-inch wafers is a major structural lever, as one 6-inch wafer produces 4.36x more chips than a 3-inch wafer.

Lumentum (LITE) Highlights

> Pricing Power: LITE is identified as the leader in 100G/200G EML and UHP lasers, positioning it to benefit from favorable pricing dynamics.

> Earnings Catalyst: Citi has opened a 90-day upside Catalyst Watch on LITE ahead of its Jun-Q earnings report and ECOC in September 2026.

> CPO Roadmap: Management maintains that Lumentum's Co-Packaged Optics (CPO) roadmap is on track, with laser shipments expected to inflect in Q4 2026 and grow further in 2027.

> Financial Revisions: Citi upwardly revised its FY2027E and FY2028E EPS estimates for LITE by 6% and 5%, respectively, reflecting an anticipated 15% price increase in FY2027E.

Coherent (COHR) Highlights

> Vertical Integration: Coherent is pursuing a strategy of full vertical integration, including growing its own InP substrates and fabricating EML/DFB laser chips in-house.

> 6-Inch Platform: COHR has begun volume production on a 6-inch InP wafer platform and expects to double its InP capacity by the end of calendar 2026.

> Constructive Outlook: Citi remains constructive on COHR, viewing recent stock pullbacks as an attractive buying opportunity given the company's role in the AI optics supply chain.

Competitive Landscape

> Chinese Competition: While domestic Chinese players are scaling up capacity, they are still trailing in qualification cycles and volume/yield stability compared to leaders like Lumentum.

> Export Controls: China's February 2025 decision to add InP to its export-control list caused a supply shock and remains a "tail risk" for the industry.

$AXT(AXTI.US) $Coherent Corp.(COHR.US) $Lumentum(LITE.US)