The Optical Module Market Will Begin To Recover In The Second Quarter

Recently, LightCounting, a market organization in the optical communications industry, released a report stating that the artificial intelligence competition has had a meaningful impact on optical device module suppliers for the first time.

In the fourth quarter of 2023, NVIDIA's demand for 4x100G and 8x100G optical modules had a significant impact on the revenue of the two optical module suppliers for the first time. Coherent's reported 800G optical module sales revenue exceeded $100 million, a 100% month-on-month increase, and the company expects further growth in 2024. InnoLight Technology announced that its fourth-quarter revenue exceeded US$505 million, a year-on-year increase of 30% and a month-on-month increase of 20%. Much of that growth is certainly related to business from Nvidia as well, but the company hasn't disclosed any details yet.

Separately, Fabrinet (Nvidia's contract manufacturer) reported a 20% increase in data communications revenue, driven primarily by its "800G Artificial Intelligence Project." But the company noted that "sequential growth has begun to slow." Fabrinet's guidance for the first quarter of 2024 is almost flat.

LightCounting notes that all of this data confirms trends observed in the past: Nvidia manufactures most of its optics in-house (Fabrinet) during the first year of deployment, but then allocates the majority of demand to Coherent and InnoLight. This is exactly the situation with 4x100G and 8x100G optical modules currently. Both Coherent and InnoLight have strong manufacturing capabilities to support significant production increases in 2024.

The chart below shows year-over-year revenue and expense growth for the top five North American hyperscale data center operators that recently reported fourth-quarter 2023 results.

Revenue growth for Alphabet, Amazon, Meta and Microsoft all picked up in the third and fourth quarters, all achieving double-digit year-over-year gains and hitting all-time highs. Compared with the fourth quarter of 2022, Apple's sales improved slightly (up 2%), but its services business grew faster (11%).

Spending growth in the fourth quarter of 2023 (red bars in the chart above) will either "increase significantly" or "decline significantly." Alphabet's capital expenditures hit a record high, with both Alphabet and Microsoft's spending increases reaching 45%-55%. In sharp contrast, spending at Amazon, Apple and Meta fell by 12%, 37% and 15% respectively, but they all increased spending in the last two quarters.

Entering 2024, the market is developing well and has changed dramatically from 12 months ago. Artificial intelligence is the hottest area right now, But LightCounting expects the entire optical module marketto begin to recover in the second quarter of 2024.

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