Lumentum tops Broadcom as AI optical demand reshapes $100B chip market

Lumentum Holdings has overtaken Broadcom as the stronger near-term AI infrastructure play, as optical networking demand and expanding margins give the company better growth visibility in a sector where investors are increasingly selective about valuation.

"The optical networking segment is seeing an inflection point as hyperscalers deploy 800G and 1.6T architectures, and Lumentum is positioned to capture that spend," said Rachel Kim, semiconductor analyst at Edgen.

Broadcom's AI semiconductor revenue continues to grow, with management forecasting more than $100 billion in AI revenue by fiscal 2027. But the company's mix shift toward custom AI chips is pressuring gross margins, which management guided to decline to approximately 74% in the coming quarter. Its infrastructure software segment, which posted a 79% operating margin on $7.2 billion in quarterly revenue, provides a stabilizing ballast — but the chip business carries the growth weight.

The divergence matters because Lumentum's optical networking focus gives it direct exposure to the fastest-growing layer of AI infrastructure — the interconnect fabric between accelerators — without the margin dilution that comes from Broadcom's custom silicon model. As hyperscalers spend billions on networking gear to scale clusters, the question is which company's margin profile can sustain the growth.

The optical networking market is undergoing a structural shift as AI workloads demand higher bandwidth between distributed compute nodes. Lumentum's product portfolio, spanning photonic integrated circuits and optical components, targets the data center interconnect segment where bandwidth requirements double every 12 to 18 months. Credo Technology Group, a peer in the high-speed connectivity space, reported fiscal 2026 revenue of $1.3 billion — more than triple the prior year — highlighting the demand trajectory for optical and electrical connectivity solutions in AI clusters.

Broadcom's advantage lies in scale and diversification. Its semiconductor solutions segment posted a 62% operating margin, while the software business delivered 79% margins on $7.2 billion in quarterly revenue. The company's AI revenue pipeline extends years into the future, with management reiterating a $100 billion-plus AI revenue target for fiscal 2027. But the margin trajectory is the variable investors are watching: as custom ASIC revenue grows as a share of the mix, consolidated gross margins are expected to compress.

Lumentum, by contrast, operates with a leaner cost structure tied to optical component manufacturing. The company's expanding margins reflect operating leverage as revenue scales, a pattern also visible at Credo, which reported non-GAAP gross margins of 68.1% and operating margins of 47.8% for fiscal 2026. Credo's cash position of $1.4 billion gives it room to invest in product development and pursue acquisitions, a dynamic that applies to Lumentum as it competes for design wins at hyperscale customers.

The competitive field includes Broadcom, Marvell Technology, and Astera Labs, all vying for position in the AI connectivity value chain. Marvell has drawn attention after Nvidia's chief called it a potential trillion-dollar company, while Astera Labs trades at a forward price-to-sales multiple of 30x. Lumentum's relative valuation — below the peer group average on an earnings basis — leaves room for multiple expansion if growth materializes as expected.

For investors, the choice between Lumentum and Broadcom comes down to margin trajectory versus scale. Broadcom trades at 13.4x forward sales, a discount to Astera Labs at 30x and Marvell at 17.6x, reflecting the market's concern about margin compression. Lumentum, with its optical networking focus and expanding margins, offers a purer play on the AI interconnect theme — but with less revenue diversification if the data center cycle turns.

This article is for informational purposes only and does not constitute investment advice.