Lumentum to sell out 4 years of AI optical capacity in 2 quarters

Lumentum Holdings Inc. said demand for its optical components is accelerating so rapidly that the company could sell out its production capacity through 2028 within the next two quarters. The surge is driven by massive capital spending from US hyperscale cloud providers building out their AI data centers.

"The capital spending from US hyperscalers is enormous and there’s no end in sight," Michael Hurlston, Lumentum's Chief Executive Officer, said in a Tokyo interview on Friday. "We are increasingly unable to keep up with demand. In just two quarters, we could sell out our entire capacity for 2028."

This updated forecast extends the company’s previous disclosure of being sold out until at least the end of 2027. To meet the intense demand, Lumentum has already increased production capacity at its key factory in the Tokyo metropolitan area by 12 times over the past two years. The company plans to invest at least $100 million in the site and adjacent facilities, a figure Hurlston suggested could rise to $250 million.

The announcement reinforces expectations for the long-term resilience of the AI infrastructure boom, sending Lumentum shares up 7.6% in pre-market trading and boosting competitor Coherent Inc. Last month, both companies received a $2 billion investment from Nvidia Corp. in exchange for procurement agreements for their advanced laser components.

Uncancellable Orders Signal 5-Year Demand Cycle

Hurlston emphasized that the term "sold out" refers to non-cancellable agreements, which provides significant revenue certainty for the company over a multi-year horizon. While he acknowledged that the current AI-driven cycle won't last forever, he believes it has a sustainable runway of "at least five years."

This long-term visibility shifts investor focus from short-term market fluctuations to the more fundamental supply-demand gap and the company's ability to execute on its delivery schedule. The pressure from customers is intense, with frequent inquiries about production output for "this quarter, the next quarter, and the quarter after that," Hurlston noted.

Japan's Supply Chain Becomes Critical Bottleneck

The industry's primary bottleneck is now shifting to the optical device level, and Lumentum's Japanese operations are at the center of it. The company's Sagamihara plant is one of the world's most advanced facilities for producing indium phosphide (InP) components, which are critical for high-speed optical communication.

Hurlston stated that moving production out of Japan is not a viable option. The manufacturing of InP requires precise control over variables like temperature, humidity, mixing speeds, and water quality. Furthermore, the extensive network of surrounding material and process suppliers is crucial for maintaining stable, high-quality output. To that end, Lumentum has secured a seven-year agreement with a "very critical" Japanese supplier.

With limited space for new equipment at its existing Sagamihara and nearby Takao facilities, the company is actively searching for new sites in Japan to expand production, specifically targeting older electronics manufacturing plants that can be retrofitted to bring new capacity online faster. The severe supply constraint for these critical AI components signals potential cost increases for hyperscalers and a sustained bullish outlook for the entire optical components sector.

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