High-Speed Interconnects

# Executive Summary * The High-Speed Interconnects industry is experiencing a historic demand surge, driven primarily by massive infrastructure build-outs for AI and cloud computing. * This demand is fueling a rapid technological evolution towards 1.6T speeds, greater power efficiency, and new architectures like Co-Packaged Optics (CPO), which are becoming the key battlegrounds for market leadership. * U.S.-China geopolitical tensions and resulting trade restrictions represent the most significant headwind, directly disrupting supply chains, impacting revenue, and forcing costly manufacturing diversification. * A clear bifurcation in financial performance is emerging: pure-play AI enablers are posting triple-digit revenue growth and high margins, while companies exposed to geopolitical risks are seeing revenues and profitability contract sharply. * Strategic capital allocation is focused on capturing the AI opportunity through aggressive research and development in next-generation technology, strategic mergers and acquisitions to acquire key capabilities, and investment in supply chain resilience. ## Key Trends & Outlook The explosive growth of AI and cloud computing is the single most important driver reshaping the High-Speed Interconnects industry. This trend is fueling unprecedented demand for faster, more power-efficient connectivity, leading to massive revenue growth for well-positioned suppliers. Companies are forecasting continued hyper-growth, with Credo Technology Group Holding Ltd (CRDO) expecting revenue to exceed $800 million in fiscal 2026 after more than doubling in 2025, and Lumentum Holdings Inc. (LITE) targeting a multi-billion dollar annual run rate for its cloud business. Over 60% of Lumentum's total company revenue now comes from cloud and AI infrastructure. This demand surge is directly impacting valuations and forcing companies to rapidly scale capacity to avoid supply constraints. To meet AI's demands, the industry is rapidly innovating toward next-generation standards. This includes the transition to 1.6T transceivers, the development of 224G-per-lane SerDes, and the critical push for new, power-efficient architectures like Co-Packaged Optics (CPO). Success in this technology race is the primary determinant of future market share. Lumentum is developing ultra-high power lasers for CPO architectures, with meaningful revenue expected in the second half of calendar 2026. Credo is investing in 3nm 1.6T DSPs, targeting power efficiency around 10 watts for full DSP solutions. Lightwave Logic, Inc. (LWLG) is developing novel electro-optic polymers for next-gen modulators capable of 112 Gigabaud, roughly equivalent to 200Gbps using PAM4 encoding schemes. The primary opportunity lies in providing the critical enabling technologies—from advanced optical components to electrical cables and foundational materials—that form the backbone of next-generation AI data centers. The most immediate risk is geopolitical. U.S.-China trade restrictions have already demonstrated a direct, negative impact on revenue and supply chains, as seen with AXT, Inc.'s (AXTI) estimated $4 million to $5 million impact on Q1 2025 revenue due to China's new export controls on indium phosphide (InP) substrates. ## Competitive Landscape The high-speed interconnects market is intensely competitive, with a mix of large, diversified players and specialized innovators all vying to capture the AI-driven growth. Some companies, like Credo, focus on integrated, system-level solutions in a specific niche. Credo's success with Active Electrical Cables (AECs) stems from owning the entire design from the internal DSP chip to the final cable assembly, ensuring reliability ("ZeroFlap") and performance that is displacing optics in certain applications. This pure-play system-level innovator strategy allows for high margins due to specialized technology and agility to focus on the fastest-growing market segments, though it carries customer concentration risk, with one customer accounting for 67% of revenue in FY25. In contrast, other large players, like Lumentum, compete by offering a broad portfolio of essential optical components at scale. Lumentum leverages its leadership in Indium Phosphide (InP) EML lasers as a core advantage while acquiring companies like Cloud Light to build a comprehensive portfolio for AI data centers and strategically moving manufacturing to Thailand to mitigate geopolitical risk. This diversified optical components leader model benefits from scale and broad customer relationships but must manage a more complex portfolio. The foundation of the industry rests on material specialists like AXT, whose primary advantage is their expertise in producing critical substrates. AXT's competitive advantage is its ability to produce low EPD InP substrates, a critical material for high-speed lasers. However, its China-based manufacturing makes it extremely vulnerable to export controls, which have severely impacted its financial performance. The key competitive battlegrounds are technological performance, particularly speed and power efficiency, and, increasingly, supply chain resilience. ## Financial Performance The high-speed interconnects industry exhibits an extreme bifurcation in revenue performance. This dramatic divergence is driven almost entirely by a company's exposure to the AI infrastructure buildout versus its vulnerability to geopolitical headwinds. Growth is not uniform; it is highly concentrated in companies directly serving hyperscale AI deployments. Credo exemplifies capturing the AI tailwind, reporting a 126% year-over-year revenue growth to $436.8 million in fiscal year 2025. In stark contrast, AXT's revenue declined 35.7% year-over-year in Q2 2025, primarily due to the direct impact of China's export controls. {{chart_0}} Profitability also shows significant divergence in margins across the industry. Margin strength is directly correlated to technological differentiation and insulation from geopolitical pressures. Companies with proprietary, high-demand products for AI command premium pricing, while those facing trade restrictions and operational challenges are experiencing severe margin compression. Credo's 64.8% gross margin in fiscal year 2025 demonstrates the pricing power of its specialized Active Electrical Cable (AEC) and Digital Signal Processor (DSP) solutions for AI. Conversely, AXT's gross margin fell to just 8.0% in Q2 2025, a direct result of the costs and disruptions from trade restrictions. {{chart_1}} Investment in the high-speed interconnects industry is heavily prioritized towards capturing future growth through technology development, strategic acquisitions, and manufacturing expansion. With the AI market opportunity being so large and immediate, companies are allocating capital to strengthen their competitive position rather than focusing on shareholder returns like buybacks. Lumentum exemplifies this trend, raising $1.1 billion in convertible notes to enhance financial flexibility for research and development, capital expenditures like its Thailand factory expansion, and potential future acquisitions. Credo's acquisition of Hyperlume, Inc. also shows the focus on acquiring next-gen technology. {{chart_2}} The financial health across the industry is mixed, reflecting each company's stage and market position. Companies successfully riding the AI wave are generating strong cash flow, while development-stage or geopolitically impacted firms require careful cash management. Credo represents a robust position, with $236.3 million in cash and positive operating cash flow of $65.1 million in fiscal year 2025.