Is Nvidia paving the way for the release of the new CPO plan? Heavily investing in optical interconnects, aiming to build "supply protection" for CPO

Nvidia invests $4 billion in two major optical communication giants to secure key production capacity for the next generation of AI computing architecture in the era of "optical interconnection."

On March 2nd local time, Nvidia announced the establishment of a multi-year partnership with optical component manufacturers Coherent and Lumentum: the collaboration includes joint research and development of optical technology, future capacity and supply priority arrangements, as well as a "multi-billion dollar" multi-year procurement commitment from Nvidia; at the same time, Nvidia is investing $2 billion in each company to support their R&D, future capacity, and operational expansion in the United States.

According to the Wind Trading Desk, JP Morgan's North America equity research team analyzed that the two transactions are "substantially similar" in structure and intent:

• Both are non-exclusive, multi-year advanced optical collaborations;

• Both include "billion-dollar procurement commitments";

• Nvidia is investing $2 billion in Coherent and Lumentum respectively to expand U.S. manufacturing capacity and support R&D; both companies mentioned that Nvidia will receive common stock in exchange for this investment.

Barclays pointed out in its latest research report that the core demand of Nvidia's investment is "supply protection" for Co-Packaged Optics (CPO).

The firm wrote: "The primary reason for facilitating the transaction is to protect Nvidia's supply for two types of CPO: Scale-out and Scale-up." In their view, this is more like preparing "early materials" for a larger-scale "optical interconnection" era, rather than a short-term supply and demand disruption.

It's like booking the entire orchard before the fruit is harvested. As the scale of AI clusters expands, traditional pluggable optical modules will face physical limits in power consumption and density. The CPO (Co-Packaged Optics) technology, which directly packages optical components with GPUs, is becoming an inevitable trend. CPO integrates pluggable transceivers directly into the switch, reducing hardware procurement costs for data center operators and significantly compressing network energy consumption.

"Where the money goes": Lasers, InP production lines, and U.S. factories

From the disclosed details, Nvidia is betting not on generic "optical interconnection modules," but more on the key light sources and core device capacities required for CPO.

Barclays assesses, "We believe that most of the targets of this transaction are aimed at 400mW continuous wave (CW) lasers." JP Morgan also emphasized that the collaboration with Coherent covers multiple product types, "including ultra-high power CW lasers for CPO."

JP Morgan revealed specific details about the funding deployment. Nvidia's investment will primarily be used to expand the U.S. manufacturing capabilities of both companies and support R&D.

For Coherent, this unrestricted funding of up to $2 billion will be prioritized for capital expenditures, especially to expand its indium phosphide (InP) production capacity at its Sherman, Texas plant. The multi-billion dollar procurement commitment will start in early 2027 and continue until 2030 For Lumentum, most of the funds will be used to build a "brand new" wafer fab in the United States. Previously, Lumentum had disclosed a "hundreds of millions of dollars" procurement order expected to be fulfilled in the first half of 2027, while this order from Nvidia is entirely incremental, with incremental revenue expected to start reflecting from the second half of 2027.

Timeline: Order fulfillment is further out, pointing to a supply-demand pattern after 2027

For the market, what is more critical is whether the revenue recognition rhythm will "immediately reflect in the financial statements." The research report leans towards "further out."

JP Morgan stated that Coherent's "multi-year, multi-billion dollar procurement commitment" is expected to start from early 2027, with cooperation "continuing until 2030." For Lumentum, the bank emphasized that the new cooperation is an increment to existing orders: the previously disclosed "hundreds of millions of dollars" procurement order is expected to be realized in the first half of 2027, while the additional revenue from this cooperation is more likely to start reflecting from the second half of 2027 and beyond.

This somewhat explains why Nvidia's actions are interpreted as "pre-emptive capacity": the CPO aims to address the interconnection bottleneck of AI clusters under higher bandwidth and lower power consumption, with its ramp-up resembling an industrial migration rather than a single-quarter pull.

Significance for the industry chain: Electrical interconnection will not disappear immediately, but the signal for "phased replacement" is stronger

Barclays anticipates that the market may first see two types of rapid responses:

First, "This is negative for companies related to electrical connections (such as CRDO)", as locking in supply may mean that short-distance CPO connections could advance more closely; however, the bank also humorously reminded with a half-joking statement to give a "phased" judgment—"Does this mean all electrical connections are about to be eliminated? (Of course, we are joking)," and reiterated that electrical interconnection will still occupy an important position in the short term, with more impact seen in long-term structural changes.

Second, the transaction further strengthens the theme of expanding the domestic supply chain in the United States. Barclays believes this transaction "does not directly point to optical modules," but may make the market more cautious about some "non-U.S." module manufacturers.

Additionally, Barclays pointed out that the timing of the transaction disclosure "is not surprising," as Nvidia "is likely to publicly discuss some new CPO solutions at the GTC conference." If the subsequent GTC conference releases a clearer productization path, the aforementioned "capacity locking" implications may be more easily used by the market to reassess the CPO advancement rhythm.