AI Optics Boom: What 1.6T Ramp Means for the LITE Stock's Prospect

AI-driven network upgrades are accelerating the optics roadmap, and Lumentum LITE is seeing the next step change arrive sooner than expected. As the industry pivots from 800G to 1.6T, higher-speed modules are improving unit economics while demand for cloud transceivers tracks ahead of plan. That combination is already translating into a sharper profitability profile, supported by tight supply in critical laser components and a favorable mix shift toward higher-value lanes.

800G to 1.6T Shift Drives the Next Demand Wave; Aids LITE

The move to 1.6T is shaping up as the next demand wave in AI optics. Lumentum says the transition ran ahead of expectations in the second quarter of fiscal 2026 and continuing into the third quarter of fiscal 2026. The company characterized demand as “substantially higher” than envisioned 90 days earlier, a notable signal given how quickly hyperscaler upgrade cycles can pull forward. 

Importantly, Lumentum expects “revenue layering” typical of larger transceiver makers to begin in the third quarter of fiscal 2026, implying that shipments and customer ramps are broadening as 1.6T moves deeper into production. With module-level margins at 1.6T described as significantly better than 800G, the speed transition is not just a volume story, it is a margin story. 

That margin story is reinforced by cloud transceiver demand tracking ahead of plan and higher-speed modules delivering better unit economics and yields. As Systems contributions expand alongside Components, operating leverage can improve as mix tilts toward higher-margin offerings. 

Lumentum’s current guidance suggests the operating leverage is expected to continue. For the third quarter of fiscal 2026, revenues are guided between $780 million and $830 million, with operating margin targeted at 30-31%. About two-thirds of the sequential revenue increase is expected from Components and one-third from Systems, reinforcing the view that both engines are contributing to the ramp. The Zacks Consensus Estimate for third-quarter fiscal 2026 earnings is currently pegged at $2.24 per share, up 45.4% over the past 30 days.

Why 200G Lane Lasers Change Lumentum’s Profit Profile

A key driver behind Lumentum’s improved profit profile is structural tightness in indium phosphide electro-absorption modulated lasers (EMLs), a foundational input for high-speed optical links. Lumentum says it is under shipping demand by roughly 25% to 30%, and that all capacity is fully allocated under long-term agreements through calendar 2027. Those long-term agreements prioritize allocation and stabilize pricing, while incremental volumes above contracted levels are negotiated at a premium. 

At the same time, product mix is shifting toward 200G lane EMLs, which carry meaningfully higher economics. Lumentum indicated that 200G lane EMLs were about 5% of units in the second quarter of fiscal 2026 and are expected to reach roughly a quarter of the mix by year-end 2026. These devices carry about two times the average selling price of 100G lanes, creating a built-in tailwind for revenue per unit and gross margin as adoption scales.

An additional lever comes from new 200G differential EMLs, which Lumentum highlighted as another pricing and margin tailwind. Taken together, tight supply, long-term allocation, and a higher-speed mix shift create conditions that can support gross margin expansion through 2026 and 2027.

Zacks Rank & Stocks to Consider

Currently, Lumentum sports a Zacks Rank #1 (Strong Buy). Shares have surged 821.4% in the trailing 12-month period.

Seagate Technology STX, Western Digital WDC and Lattice Semiconductor LSCC are stocks worth considering in the broader Zacks Computer and Technology sector. Each of the three stocks sport a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here. 

Long term earnings growth rate for Seagate, Western Digital and Lattice Semiconductor is currently pegged at 38%, 51.1%, and 30.6%, respectively. Shares of Seagate, Western Digital and Lattice Semiconductor have surged 310.8%, 482.4%, and 47.6%, respectively, in a year.

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This article originally published on Zacks Investment Research (zacks.com).

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