Nvidia (NVDA) announced on March 2, 2023, a significant strategic collaboration with optical technology manufacturers Lumentum (LITE) and Coherent (COHR), committing a total of $4 billion — $2 billion in each company. This investment marks a pivotal step in Nvidia’s strategy to enhance its position in the AI data center network architecture sector.
The agreements not only involve direct capital investment but also include extensive procurement commitments, granting Nvidia priority access to future production capacities for advanced laser components from both companies. Following the announcement, Lumentum’s stock surged nearly 12%, while Coherent witnessed gains exceeding 15%. Nvidia’s shares also rose by nearly 3% in response.
Nvidia stated that optical interconnects and advanced packaging integration are fundamental to next-generation AI infrastructure, providing ultra-high bandwidth and energy-efficient connectivity essential for AI factories. The multi-year strategic deal with Lumentum entails billions in procurement commitments and rights to future capacities for advanced laser components, while the collaboration with Coherent expands this framework by including access to future technologies related to optical networking products.
Lumentum CEO Michael Hurlston characterized the partnership as a reflection of a shared commitment to advancing optical technology to support next-generation AI infrastructure. Concurrently, Lumentum plans to invest in new manufacturing facilities to enhance capacity and stimulate innovation. Similarly, Coherent CEO Jim Anderson highlighted the partnership as a critical step in enabling next-generation AI data centers, reinforcing a relationship that spans two decades.
Nvidia’s $4 billion investment aligns strategically with its Co-Packaged Optics (CPO) technology initiative launched last year. In March 2022, Nvidia introduced two data center switches utilizing CPO technology, and this investment secures essential components in its supply chain for advanced AI infrastructure. CPO technology integrates transceivers directly into switches, reducing costs and energy consumption compared to traditional solutions that rely on separate, costly pluggable transceivers.
Industry analysts believe that Nvidia’s substantial investment aims to accelerate the commercialization of CPO technology, which is vital for next-generation data center networking. According to a recent report from Barclays, the primary goal of Nvidia’s investment is to ensure supply protection for CPO technology. The timing of the announcement aligns with Nvidia’s anticipated public discussion of its new CPO solutions at the upcoming GTC conference.
Barclays noted that the deal primarily aims to protect supplies for Nvidia’s two types of CPO: scale-out and scale-up interconnects. The investment appears to be more of a strategy to prepare for a larger shift towards an “optical interconnect” era rather than merely responding to short-term supply fluctuations. As the scale of AI clusters expands, traditional optical modules face limitations in power consumption and density, making CPO technology — which packages optical components with GPUs — increasingly essential.
Barclays assessed that the majority of the investment is directed towards 400mW Continuous Wave (CW) lasers, while JPMorgan highlighted that the partnership with Coherent encompasses various products, including ultra-high power CW lasers specifically for CPO applications.
Both Lumentum and Coherent are prominent players in the U.S. photonics market, but they have distinct business focuses. Lumentum is renowned for its CPO-optimized laser modules, which emit a stable 1311nm beam and feature integrated temperature management, enhancing transmission efficiency. The company’s recent earnings report indicated a revenue of $665.5 million in the last quarter, covering sectors such as traditional pluggable transceivers, optical circuit switches, and industrial lasers.
Lumentum has also initiated a capacity expansion plan for CPO components, anticipating the increased demand driven by the surge in AI computing power. With extensive expertise in optical technology, the company is positioned as a crucial player in AI, cloud computing, and next-generation communication networks.
Coherent, on the other hand, is focused on using photons to develop high-performance optical components and systems, with its operations extending into the industrial and data center laser sectors. Recently, it launched a laser transmitter tailored for CPO systems and provides ancillary equipment such as fiber optic cables. In contrast to Lumentum, Coherent also engages in testing tool businesses, offering products that simulate various types of optical network traffic, thus supporting engineering development for network equipment suppliers.
This substantial investment by Nvidia signals its commitment to securing the foundational technologies necessary for the future of AI infrastructure, as demand for advanced data center capabilities continues to grow.
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