The Market Doesn’t Know CPO Yet - Damnang’s Substack

The Market Doesn’t Know CPO Yet

A blueprint for the second phase of the optics trade, drawn from the ground in Silicon Valley

Optics has been one of the hottest themes in AI infrastructure investing over the past year. Shares of optical component and module companies have multiplied, and CPO has drawn attention right in the middle of that move.

By now, most investors have at least heard the term co-packaged optics.

But does the market really know CPO?

Ask which components come from where, what path they travel before ending up inside a switch, and which companies along that path are bottlenecks versus bystanders, and suddenly very few people have answers.

The early production ramp is starting now, and this is the point where that difference starts showing up in returns. Preparing for the second phase of the optics trade means knowing the supply chain behind the name.

This article follows that supply chain to the end.

Where the light is made, who fabricates the chips that load signal onto it, where the two meet to become a single switch, and who inspects every seam along the way.

I first draw a map of the entire CPO supply chain from materials to systems, then layer on the field accounts and the industry's felt temperature that filings and IR decks alone cannot show.

On top of that come six CPO investment theses, and finally the investment strategy grounded in those theses, all of it covered here.

Table of Contents

  1. How a Single CPO Gets Made
  2. The CPO Supply Chain Map: From Materials to Systems
  3. Voices from the Field: What Is Actually Circulating Around CPO in 1H 2026
  4. When CPO Really Arrives: Six Theses and the P&L Arithmetic by Layer
  5. From Thesis to Position: Core, Satellites, and Options
  6. Closing: The Thesis Verification Calendar

1. The CPO Supply Chain Map: From Materials to Systems

Behind every CPO switch, two manufacturing chains with different starting points run in parallel: the chain that makes the light itself, and the chain that loads signal onto that light.

Part 1 answered the question of why CPO exists. Now we move to the next question. If you crack open a chip package with CPO, what’s actually inside? What does each component do, and how do they all connect? And once you’ve solved the problem for switches, where does the technology go from there?

The chain of light starts from a single-crystal InP boule, an ingot in industry terms. Unlike silicon, InP is a direct bandgap material that can convert current into light, so on substrates sliced from the ingot, MOCVD equipment stacks quantum wells one atomic layer at a time, and the result is processed into DFB laser dies.

Lasers for CPO are high-power CW parts at 400mW and above, 6 to 11 times stronger than the CW lasers in existing SiPho transceivers (30 to 70mW). The laser only makes the light and hands modulation to the engine inside the package, but in exchange it has to deliver enough output to survive the coupling and splitting losses on the way to the engine, while still meeting noise specs like linewidth and RIN.

What deserves attention is the seams between the processes. Light converts misalignment at the micron level directly into loss, which is why an inspection and test gate sits at every seam. Divide the chain along these seams and the skeleton of the map emerges:

Stream A, the chain that makes light, with three layers;
Stream B, the chain that handles signal, with three layers;
the convergence point where the two streams meet, with three layers;
two horizontal axes of equipment and test cutting across the entire chain;
and the boundary camp outside CPO that shakes the pace of penetration.

Stream A: The Chain That Makes Light

A1. InP Substrates
The InP substrate market is an oligopoly with Sumitomo Electric first, AXT second, and the JX Metals family behind them. Growing 7N-purity material into ingots is itself the barrier to entry.

A2. Epitaxy
The epiwafer is the intermediate good between substrate and laser. Crystal layers have to be grown on the InP substrate via MOCVD before it becomes an epiwafer that can be processed into lasers.

A3. Lasers (ELS): A Five-Way Socket Race
High-power CW lasers are currently a market Lumentum dominates. Meeting linewidth and RIN specs at high output is a different order of difficulty from conventional low-power CW.

Stream B: The Chain That Handles Signal

B1. SOI Wafers
SOI for photonics is a market locked up by Soitec’s Smart Cut. Optical loss in a waveguide is directly tied to the uniformity of the BOX layer and the quality of the silicon layer.

B2. PIC Foundries
The PIC foundry landscape is a contest among Tower, TSMC, and GlobalFoundries. Tower disclosed that it signed contracts with its largest customers for $1.3B of SiPho revenue in 2027.

B3. Optical Engine Integration and Modulation Technology
Engine integration is the layer with the loudest camp warfare on this map. The COUPE stack is the benchmark in production track record, but the architecture race is not closed.

The Convergence Point: From Package to System

C1. Packaging/OSAT
At the packaging stage where the two streams converge, 3D stacking of EIC and PIC is handled by TSMC’s COUPE and SoIC.

C2. Connectors/Fiber/Micro-Optics
Spectrum-X Ethernet Photonics integrates 512 lanes of optical I/O in a single package and extracts the light through surface-normal detachable connectors.

C3. System Assembly
Integrating the switch and CPO assembly into a chassis and running system-level test falls to Fabrinet and Foxconn.

The Horizontal Axes: Two Lines That Cut Across the Whole Chain

Axis 1. Equipment
MOCVD for InP epitaxy is a market Aixtron effectively monopolizes with its planetary reactor.

Axis 2. Test/Verification/Inspection
Every seam in CPO is a yield gate, and every gate carries inspection and test equipment.

The Boundary: Pluggables, LPO, and Dual Exposure

Reading attach rate requires looking outside the map too. On the other side stand two camps. One is the pluggable camp. But reading this camp as a simple victim of CPO gets it wrong.

With this boundary in view, the layers inside the map split into two kinds. Engines, COUPE packaging, and CPO-specific connectors are architecture-dependent layers that only earn if the CPO architecture wins.

That completes the anatomy of the CPO supply chain: how the light is made, how signal gets loaded onto it, where the two meet, and who stands at each layer.

From here, I layer onto this map the Silicon Valley stories found in no filing and no IR deck, build six investment theses on top of it, and finally convert those theses into names and weights.