Photonics and the AI Data Centre: Why Light is Replacing Copper — and Which Stocks Stand to Win

By Balaji N, CFP · True Value Research · June 8, 2026

The Copper Wall

For most of computing history, data moved through data centres on copper wire. Electrons carried signals between servers, switches, and storage arrays cheaply and reliably. That era is ending. The explosion of AI infrastructure — GPU clusters running hundreds of thousands of accelerator chips simultaneously — has pushed copper to a physical limit that no amount of engineering can overcome.

At 800 gigabits per second, and now at 1.6 terabits, copper signals degrade too quickly, generate too much heat, and consume too much power. A single high-speed copper cable at these data rates dissipates several watts of heat per metre. Multiply that across tens of kilometres of cabling inside a modern hyperscale data centre, and the thermal and energy costs become unacceptable. The laws of physics, not engineering failure, are driving the transition.

Light does not share these constraints. Photons travel without resistance, generate no heat in transit, and can carry multiple independent data streams on the same fibre simultaneously using different wavelengths — a technique called wavelength-division multiplexing. A single optical fibre at 1.6T carries more data than a hundred copper cables while using a fraction of the power. For operators spending hundreds of millions of dollars annually on electricity, this is not a marginal improvement. It is a structural cost advantage.

What Silicon Photonics Actually Is

Silicon photonics is the discipline of building optical components — lasers, modulators, waveguides, and photodetectors — on standard silicon chips using the same fabrication techniques that produce conventional semiconductors. The elegance of the approach is economic as much as technical: existing chipmaking infrastructure, built over decades at enormous cost, can now be used to manufacture photonic devices at semiconductor scale and price points.

The practical output of this technology in the data centre context is the optical transceiver — a module that converts electrical signals from a network switch or GPU into light pulses, fires them down a fibre optic cable, and converts them back to electrical signals at the other end. The transceiver market has been tracking an aggressive generational cadence: 400G became standard across AI clusters through 2024, 800G volumes are ramping now, and 1.6T transceivers are entering production in 2026. Each generation doubles bandwidth and improves energy efficiency per bit transmitted.

Beyond transceivers, the frontier involves two more ambitious architectures. Optical circuit switching routes light directly between racks without converting it to electricity at intermediate points, eliminating latency and power consumption. Co-packaged optics goes further still, integrating photonic chips directly onto the same substrate as network switch ASICs, collapsing the electrical-to-optical conversion point to micrometres rather than metres. Both are transitioning from research to commercial deployment in 2026 and 2027.

The Scale of the Opportunity

The silicon photonics market was valued at roughly $562 million in 2025. Analysts project it to reach $6 billion by 2035, a compound annual growth rate approaching 27 percent. Those numbers almost certainly understate the addressable opportunity once co-packaged optics scales into volume production.

The underlying driver is hyperscaler capital expenditure on AI infrastructure. Microsoft, Meta, Google, and Amazon collectively committed more than $400 billion to AI infrastructure spending in 2026. Optical networking typically represents 15 to 20 percent of total data centre capital expenditure — a share that is growing as clusters become larger. NVIDIA alone committed $4 billion in strategic investments to silicon photonics companies in early 2026.

Applied Optoelectronics (AAOI): The Vertically Integrated Pure-Play

Applied Optoelectronics has been the single largest stock-price beneficiary of the photonics wave in 2026, with shares up more than 440 percent year-to-date by June. The company's defining characteristic is vertical integration that extends further up the supply chain than any competitor: it grows its own indium phosphide semiconductor crystals, fabricates laser chips on those substrates, and assembles finished transceiver modules.

The company reported first-quarter 2026 revenue of $151 million, up 51 percent year-over-year, with data centre revenue more than doubling to $81 million. Management issued full-year 2026 revenue guidance above $1 billion — more than double its $455 million in 2025. The 1.6T production ramp is targeted through the remainder of 2026, with 3.2T products planned for 2027.

The risks are proportional to the upside. AAOI carries meaningful customer concentration, and heavy insider selling by the CEO and CFO in May 2026 added a note of caution. The stock remains one of the most volatile in the AI infrastructure universe.

Lumentum Holdings (LITE): The Premium Pure-Play with NVIDIA's Backing

Lumentum pivoted aggressively toward AI data centre applications over the past 18 months, and the results have followed. Fiscal second-quarter 2026 revenue reached $665 million, up 66 percent year-over-year, with non-GAAP operating margins expanding dramatically as the data centre business scaled.

NVIDIA committed $2 billion to fund a new U.S.-based laser fabrication facility dedicated to Lumentum's next-generation photonic components. The company has also built an optical circuit switching backlog exceeding $400 million, with a multi-hundred-million-dollar co-packaged optics order scheduled for H1 2027. Lumentum was added to the S&P 500 in March 2026. On a one-year basis through April 2026, LITE stock had risen more than 1,100 percent.

Coherent Corp. (COHR): The Diversified Incumbent

Coherent is the largest and most diversified company in the photonics sector, spanning optical components, compound semiconductors, industrial lasers, and defence electronics. Data centre and communications now account for approximately 75 percent of its revenue. Fiscal Q3 2026 revenue reached $1.81 billion, up 21 percent year-over-year. Like Lumentum, Coherent received a $2 billion NVIDIA investment and S&P 500 inclusion in March 2026. Its shares are up roughly 97 percent year-to-date — strong in absolute terms but trailing the pure-play names, reflecting the market's preference for focused exposure.

Marvell Technology (MRVL): The Semiconductor Platform Play

Marvell is not a photonics pure-play — it is a broad semiconductor platform that has made optical interconnects a central strategic priority. In December 2025, it announced the acquisition of Celestial AI for up to $5.5 billion. In April 2026, it acquired Polariton Technologies and released its 1.6T optical DSP platform in collaboration with Lumentum. Marvell's advantage is scale and integration: it already supplies custom AI silicon to hyperscalers at significant volume, allowing it to offer optical interconnect solutions as part of a broader platform.

Ciena Corp. (CIEN): The Network Systems Beneficiary

Ciena sells complete optical networking systems to telecoms carriers and cloud providers rather than individual components. Its WaveLogic coherent optical engines are among the most advanced long-haul optical systems in the industry. Its exposure to the AI photonics theme is indirect but real — as AI traffic explodes, the long-haul and metro networks operators run require continuous capacity upgrades. Its shares have risen more than 113 percent year-to-date, reflecting confidence in the upgrade cycle without the customer concentration risk of the pure-play component names.

Viavi Solutions (VIAV): The Picks-and-Shovels Play

Viavi makes the test and measurement equipment that certifies every fibre run, validates every transceiver, and monitors every optical network. This positioning makes its revenue largely agnostic to which component vendor wins any given deployment — whether a hyperscaler buys from AAOI or LITE, it will likely use Viavi equipment to test them. The stock rose nearly 149 percent year-to-date through April 2026, the second-best performer in the cohort.

How to Think About These Stocks Differently

The six companies described here are not interchangeable positions. AAOI offers concentrated transceiver exposure with maximum volatility. LITE offers premium, higher-margin photonics backed by NVIDIA with a co-packaged optics platform. COHR offers diversified scale with S&P 500 inclusion. MRVL offers photonics as part of a broader semiconductor platform. CIEN offers indirect exposure through network system sales. VIAV offers picks-and-shovels exposure that benefits from the buildout regardless of which hardware vendor dominates.

The structural risk common to all of them is NVIDIA's own photonics ambitions. At its GTC 2025 conference, NVIDIA unveiled its own co-packaged silicon photonics switch — a signal that the dominant AI chip company may eventually vertically integrate the optical layer the way it integrated networking with Mellanox. If that happens at scale, the component suppliers currently riding NVIDIA's capex wave could find themselves competing with their most important customer. It is the sector's most consequential open question.

Disclaimer: This article is for informational and educational purposes only and does not constitute investment advice or a solicitation to buy or sell any securities. Always consult a qualified financial advisor before making investment decisions.