Anxiety over optical modules: "CPO impact" is misinterpreted, and "excessive concentration of chips" requires time to digest

Will CPO technology quickly and comprehensively replace pluggable optical modules? This may be a typical market misconception.

On February 8, Guosheng Securities analysts Song Jiajie, Huang Han, and Shi Yujie published a report titled “Telecommunications: The Divergence and Convergence of Optical Module Logic,” providing a detailed interpretation of the market anxiety triggered by Nvidia’s announcement to deploy CPO technology at scale this year. The analysts believe that this concern “has diverged from the fundamentals of industry development and is a misinterpretation of CPO technology, leading to irrational divergence in market valuations.”

CPO and pluggable modules are not “life and death” rivals but “parallel developments”

The market generally worries that CPO will fully replace pluggable optical modules, but the report clearly states that “pluggable and CPO are not opposing or fully substitutive models but two parallel paths”. In the next two to three years, pluggable modules will still be the mainstream for “scale-out” (outside the cabinet) interconnection.

The core logic lies in the differences in application scenarios:

• CPO scenario: “The main scenario for CPO is scale-up (inside the cabinet), promoted by chip manufacturers including Nvidia.” The report explicitly defines: “CPO is essentially about opening new growth in the intra-cabinet optical communication market, not replacing the existing market.”

• Pluggable scenario: “In the main scale-out (outside the cabinet) scenario, CSP vendors prefer decoupling solutions and do not plan large-scale deployment of CPO.”

Based on this, the report provides a clear timeline judgment: “In the next two to three years, and even longer, pluggable optical modules will remain the mainstream solution for data center optical interconnects.”

Major players are not being abandoned; technological barriers are actually increasing

Another layer of market anxiety concerns ecosystem exclusion, i.e., the fear that “chip manufacturers collaborating with TSMC on CPO development will exclude optical module manufacturers from the CPO ecosystem.”

In response, the report offers a strong rebuttal. The dependence of CPO technology on silicon photonics capabilities is precisely the moat for leading optical module manufacturers.

The analysis states: “In fact, the compatibility of CPO with silicon photonics makes it inherently more reliant on silicon photonics chip capabilities. Leading optical module design (PIC) capabilities in silicon photonics are already advanced, with early technical research and reserves in the CPO field. This increase in technical barriers actually benefits top-tier manufacturers.”

Leading optical module manufacturers are not excluded from the ecosystem; rather, their deep technical accumulation consolidates their competitive advantage.

The “pain” caused by crowded chips needs time to digest

Beyond technical misconceptions, recent fluctuations in the optical module sector are more due to market trading structure issues. The report bluntly states: “The current chip holding structure in the optical module sector is overly concentrated and requires time for structural optimization and self-correction.”

This concentration stems from strong fundamentals. The report notes, “Over the past few quarters, optical module manufacturers have been the main beneficiaries of the AI computing wave, with high visibility of performance, driven by solid fundamentals, leading to highly concentrated institutional investor holdings.”

Even during the traditional Q4 investment off-season, “the demand certainty and profit growth of optical modules have clear comparative advantages, attracting a large amount of momentum-chasing capital.”

However, this also has side effects. The rapid influx of funds has led to instability in chip holdings.

“The rapid concentration of holdings means the sector has accumulated a large amount of short-term floating profits and trend trading positions. These holdings are relatively unstable, sensitive to negative news, and prone to loosening due to short-term market style shifts or industry news, thereby exacerbating stock price volatility.”

The report emphasizes that this is a normal phenomenon in the growth process: “The sector needs time to digest floating profits and re-exchange chips, stabilizing the holding structure.” As “the performance of optical module manufacturers gradually releases, market concerns and disagreements over uncertainties will gradually settle, and perceptions of the optical module sector will return to convergence.”

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