InP Optical Materials Shift to Allocation
Summary
Lumentum, Coherent and IQE describe laser, epiwafer and substrate constraints that make committed InP supply a key limit on AI optical shipments.
From August 11 to September 7, 2026, Lumentum Holdings (LITE), Coherent (COHR) and IQE (IQEPY) described supply constraints in lasers, indium phosphide epiwafers and substrates during earnings calls. AI optical-interconnect shipments increasingly depend on internal capacity or supply allocations secured in advance.[1][2][3]
The control point has moved to the InP light source
Optical transceivers in AI data centers convert electrical signals into light. As 800G and 1.6T products raise the speed of each lane, they require more lasers and photodetectors made with indium phosphide. The chain begins with substrate wafers, moves through epiwafer growth and laser-chip fabrication, and ends with assembly into a transceiver. A shortage at any layer can prevent an assembler from committing additional shipments even when assembly capacity is available.
Supply is consequently moving from ordinary purchasing toward allocation against prior commitments. Lumentum said demand for high-power lasers is growing faster than supply and customers will use whichever light-source solution they can obtain. It also received its first order for an external light-source module.[1] Packaging laser chips into a complete module serves customers that cannot handle individual chips and carries a selling price meaningfully above the lasers inside it.
Disclosures at three layers point to allocation constraints
Coherent is retaining expanded InP production for its own transceivers. It said internal output would double year over year by the end of the third quarter of 2026 and was scheduled to more than double again by the end of 2027, but it still did not expect to sell lasers externally in the near term.[2] Management said: “I do not see any time in the near future where we would be selling Indium Phosphide lasers externally. Our data center transceiver demand is absorbing every bit of capacity that we have and then some.”
IQE located the constraint farther upstream. The company said securing InP substrate allocations had become an ongoing task and that supply risk was reflected in its second-half 2026 outlook. It would not provide a 2027 outlook until long-term agreements and substrate constraints became clearer.[3] The limitation has therefore entered the boundary of committed revenue and guidance, rather than remaining only a management comment.
AXT (AXTI) offered the supply-side version of the same signal. When demand exceeds planned capacity, it does not accept additional orders, so backlog understates demand.[4] The company received $47.7 million in customer prepayments during the second quarter of 2026. InP revenue was $30.7 million, about 65% of total quarterly revenue of $47.6 million. Such prepayments allocate future capacity to contracted customers.
Scarcity value reaches substrates and expansion equipment
When transceiver manufacturers cannot obtain lasers, the first operating effect appears in committable shipments rather than inquiries. Substrate suppliers may secure economics through long-term agreements, prepayments and higher-value larger-diameter products, while expansion creates equipment orders. Veeco (VECO) supplies epitaxy, wet-processing and facet-coating tools for InP laser lines. In August 2026, it said a photonics company had selected its equipment to manufacture datacom lasers.[5]
Separately manufactured and sold optical dies also require dedicated production testing and burn-in. Optical-device test and burn-in represented 20% of Aehr Test Systems' (AEHR) fiscal 2026 revenue, and the company expects the category to account for 15% to 20% of its $130 million to $150 million fiscal 2027 revenue guidance.[6] This is adjacent exposure, not a disclosed direct benefit from the InP shortage. Limited chip output could also reduce the volume available for testing.
The boundary is that capacity is expanding and allocation does not affect every buyer equally. Coherent and Lumentum are expanding wafer-fab output faster than previously planned. Applied Optoelectronics (AAOI), which secured substrate supply in advance from seven suppliers, said it was not currently limited by substrate capacity.[7] Investors should follow committable shipment volume, long-term agreement coverage and six-inch substrate yields rather than relying only on backlog.
Companies exposed to the change
- AXT (AXTI): AXT sits at the constrained InP substrate layer. Prepayments and long-term agreements may improve capacity visibility and product mix, but execution on expansion determines how long the constraint lasts.
- Veeco (VECO): Veeco sells multiple manufacturing tools into new InP laser lines. Expansion can create orders, but the frozen evidence does not establish that every planned line will buy equipment on schedule.
- Aehr Test Systems (AEHR): Aehr supplies production test and burn-in equipment for optical devices. Higher standalone optical-die volume may increase test demand, but its disclosures do not directly attribute growth to this shortage.
Sources
[1] Drillr · Lumentum Holdings (LITE) · 2026-08-11 · FY2026 fourth-quarter earnings call
[2] Drillr · Coherent (COHR) · 2026-08-12 · FY2026 fourth-quarter earnings call
I do not see any time in the near future where we would be selling Indium Phosphide lasers externally. Our data center transceiver demand is absorbing every bit of capacity that we have and then some.
[3] Drillr · IQE (IQEPY) · 2026-09-07 · FY2026 interim-results earnings call
[4] Drillr · AXT (AXTI) · 2026-07-30 · FY2026 second-quarter earnings call
[5] Drillr · Veeco Instruments (VECO) · 2026-08-05 · Q2 2026 earnings call
[6] Drillr · Aehr Test Systems (AEHR) · 2026-07-14 · FY2026 fourth-quarter earnings call
[7] Drillr · Applied Optoelectronics (AAOI) · 2026-08-06 · Q2 2026 earnings call
This material identifies potentially overlooked industry changes and companies. It is not a stock recommendation.