Partnering With Lumentum and Coherent, Can Nvidia’s $4 Billion CPO Bet Support the Future of AI Computing Power?

TradingKey - On Monday, March 2 local time, Nvidia ( NVDA) announced a deep strategic collaboration with optical technology manufacturers Lumentum ( LITE) and Coherent ( COHR) through which it will invest $2 billion in each company, totaling a $4 billion major commitment. This move propels Nvidia's strategic positioning in the AI data center network architecture field to a new stage.

In addition to the direct capital injection, these deals include massive procurement commitments and priority access to the future production capacity of advanced laser components from both companies.

Upon the announcement, Lumentum's shares surged nearly 12% at the close, while Coherent's gains exceeded 15%. Nvidia's own stock rose nearly 3% in tandem.

In a statement, Nvidia clearly indicated that optical interconnects and advanced packaging integration are the foundations of next-generation AI infrastructure, providing ultra-high bandwidth and energy-efficient connectivity for AI factories.

According to the agreements, the multi-year strategic deal with Lumentum covers billions of dollars in procurement commitments and rights to future capacity for advanced laser components. The collaboration with Coherent goes further, adding future technology access and priority capacity rights for advanced lasers and optical networking products.

Lumentum CEO Michael Hurlston stated that this multi-year strategic agreement reflects a mutual commitment to advancing optical technology to power next-generation AI infrastructure. Lumentum will also simultaneously invest in new manufacturing facilities to increase capacity and accelerate innovation.

Coherent CEO Jim Anderson emphasized that this partnership highlights Coherent's position as a key enabler of next-generation AI data center infrastructure and further deepens a 20-year relationship, helping Nvidia build future-ready AI data centers.

Nvidia Bets on CPO Strategy

Nvidia's $4 billion investment in the optical sector aligns perfectly with the CPO technology strategy it launched last year.

As early as last March, Nvidia introduced two data center switches featuring CPO technology. Since Lumentum and Coherent are key suppliers of the core laser components for this technology, this investment effectively secures the core supply chain for next-generation AI infrastructure.

To understand the importance of this investment, one must first understand what CPO technology actually is.

In AI clusters, large numbers of servers are connected via optical fibers. Switches act like "signal transit stations," responsible for converting digital data into optical signals for transmission and then back into digital data.

In traditional solutions, this conversion uses independent pluggable transceivers, which are not only costly but also consume significant energy. CPO technology integrates transceivers directly into the switch, eliminating redundant hardware layers. This reduces procurement costs and significantly lowers energy consumption, perfectly meeting the demands of explosive growth in AI computing power.

Industry analysts suggest that the core objective of Nvidia's massive investment is to accelerate the commercialization of Co-Packaged Optics (CPO) technology.

As a key technology for next-generation data center networking, CPO integrates originally independent pluggable transceivers directly into the switch. This not only significantly reduces hardware procurement costs for data center operators but also substantially lowers operational energy consumption, addressing network bottlenecks caused by the explosive growth of AI computing power.

Barclays ( BCS) pointed out in its latest research report that the core objective of Nvidia's investment is "supply protection" for CPO technology, and the timing of the disclosure is "not surprising"—as Nvidia is "likely to publicly discuss part of its new CPO solutions at the GTC conference."

The bank analyzed: "The primary reason for the deal is to protect supply for Nvidia across two types of CPO: scale-out and scale-up interconnects." In its view, this appears more like stockpiling for a larger "optical interconnect" era rather than a response to short-term supply and demand fluctuations.

As AI cluster scales continue to expand, traditional pluggable optical modules are facing physical limits in power consumption and density. CPO technology, which packages optical components directly with the GPU, has become an inevitable industry trend. Based on the disclosed details, Nvidia is not betting on generic "optical interconnect modules," but rather on the capacity for critical light sources and core components required for CPO.

Barclays judges that "the majority of the deal targets 400mW Continuous Wave (CW) lasers." JPMorgan also emphasized that the collaboration with Coherent covers various products, "including ultra-high power CW lasers for CPO."

The Photonics Powerhouse Duo Behind Nvidia

As core partners in Nvidia's CPO supply chain, Lumentum and Coherent are both leading U.S. photonics companies, yet they differ in business layout and technical focus.

Lumentum is a world-class supplier of CPO-optimized laser modules. Its core products emit a stable 1311nm beam and feature built-in temperature management mechanisms, significantly enhancing the stability and efficiency of network transmission.

According to its latest earnings report, the company's revenue reached $665.5 million last quarter, with a business footprint covering three main sectors: traditional pluggable transceivers for AI data centers, optical circuit switches for AI cluster traffic optimization, and industrial lasers for scenarios such as metal welding.

As early as last September, Lumentum initiated a capacity expansion plan for CPO components, clearly anticipating the demand growth brought by the explosion in AI computing power. With years of deep expertise in optical and photonics technology, the company's R&D results have become a core force supporting AI, cloud computing, and next-generation communication networks.

Another U.S. company, Coherent, also focuses on photonics, with its core business revolving around using photons to manufacture high-performance optical components and systems. Its business also spans the industrial and data center laser sectors. It recently launched a laser transmitter specifically customized for CPO systems and also provides auxiliary equipment such as fiber optic cables.

Unlike Lumentum, Coherent also operates in testing tool businesses like optical spectrum synthesizers, which can simulate different types of optical network traffic for network equipment suppliers, providing technical support at the engineering development level.