Morgan Stanley interprets the ECOC conference: NPO consensus shifts toward 2028 deployment, optical components sold out for 12-18 months, these US stocks are best positioned to benefit.

Morgan Stanley's first-hand notes from the 2026 European Conference on Optical Communication (ECOC) delivered three key judgments: industry consensus has shifted from "whether to do NPO" to "first products landing in 2028"; the optical communications supply chain is nearly sold out across the board for 12-18 months, with indium phosphide (InP) substrates the tightest link; and regardless of which technology path prevails, test equipment maker Keysight is the most reliable beneficiary. Morgan Stanley telecom and networking equipment team analysts Meta A Marshall and Antonio Jaramillo released the latest report, with an In-Line industry view (in line with the market). The notes summarized a round of meetings the team hosted during the ECOC exhibition in Malaga, Spain, from September 21 to 22. This year marked the 52nd ECOC, held from September 20 to 24, drawing more than 8,300 attendees and over 330 exhibitors, about 120 of which came from China. Morgan Stanley said detailed company-level notes on Cisco Systems, Inc. (CSCO.US), Ciena (CIEN.US), Coherent (COHR.US), Keysight (KEYS.US), Nokia Oyj Sponsored ADR (NOK.US), Tower Semiconductor (TSEM.US) and Lightmatter will be published over the coming days. NPO moves from "resistance" to "consensus": first products to enter trial operation in 2028 Compared with the OFC exhibition six months earlier, the biggest change at this ECOC was the attitude toward NPO (near-packaged optics). According to Morgan Stanley's notes, while it was expected that optical content growth would outpace supplier capacity, that a large number of vendors' order books would be full for 12-18 months, and that the final form of CPO/NPO remained undecided, what differed from the OFC period was that the industry now more broadly recognizes that "NPO will begin to land starting in 2028." The formation of this consensus is directly tied to the progress of the Open CPX MSA. This industry group is establishing unified parameters for optical engines, enabling a broader ecosystem to be builtso hyperscale cloud providers no longer worry about "vendor lock-in" and closed ecosystems as they did when NVIDIA Corporation's solution was the only option. Morgan Stanley still cautions that enormous challenges remain in the coming years around scale, production and deployment; the formation of consensus merely means that enough suppliers are advancing open solutions and that demand for placing optics closer to electronics in scale-up networks continues to grow, with the first products entering trial operation at least by 2028. Notably, the notes explicitly state: the architecture of first-generation products is unlikely to be the final formthe laser type, laser location and more may change in subsequent generations, and today's competitive technology landscape "does not lock in long-term winners and losers." This judgment aligns with consensus at the conference: although a few sessions still described CPO/NPO as "inevitable, but not imminent," the mainstream view is now that hyperscalers will shift toward NPO in the coming years. Supply chain sold out for 12-18 months: InP substrates are the biggest bottleneck Morgan Stanley's notes said most component and system suppliers' capacity is sold out for the next 12-18 months, with InP substrates the "gating item," naming AXT (AXTI) and Sumitomo Electric in the report. Beyond InP, supply is similarly tight for major categories including EML, CW lasers, pump lasers and gold boxes. The report argues there is upside for the industry if more substrates are released or yields improve. This judgment corroborates recent public comments from vendors. Lumentum CEO Michael Hurlston previously said the InP supply-demand gap has exceeded 30%, that the company's key AI optical device capacity is "effectively sold out for the foreseeable future," and that the shortage "may be more severe than in the memory industry." Coherent also warned about the InP shortage on its earnings call in May this year. The roots of this shortage trace back to February 2025: China has imposed export controls on indium phosphide since then, and China produces about 70% of the world's refined indiumthe upstream raw material for InP. According to market tracker data, the average price of 6-inch InP wafers has risen about 250% since the controls to roughly $5,000 per wafer; NVIDIA Corporation, seeking to lock in optical device supply, has also taken stakes in both Lumentum and Coherent. On the ECOC exhibition floor, the importance of external lasers found more concrete expression: Lumentum showcased an eight-wavelength DWDM external laser (ELSFP) module compliant with the Optical Compute Interconnect MSA requirements, explicitly targeting external light source applications in CPO/NPO architectures. This echoes Morgan Stanley's note that "first-generation NPO/CPO products will most likely all use external lasers, and demand for high-power lasers will surge in the coming years"which is also why LITE and COHR continued to receive the most attention in the report. Still, the sellout is not uniform. Morgan Stanley noted that Cisco Systems, Inc. and Nokia Oyj Sponsored ADR said at the conference they still have some supply capability, allowing them to take strategic actions around supply release in the near term, but the report does not expect meaningful share shiftsCiena still holds the majority share in line systems. OCS is spreading, but Alphabet Inc. Class C remains in a league of its own Optical circuit switching (OCS) was another subplot in the report. Alphabet Inc. Class C's use of OCS has been widely reported, and its production ramp will shift to Lumentum in the coming years. Spurred by Alphabet Inc. Class C's successful demonstration, nearly all other hyperscalers and neocloud providers are trialing OCS, and Morgan Stanley heard at the conference that there will be more customers in the coming years. But the notes also temper expectations: later entrants' use cases are likely smaller than Alphabet Inc. Class C's deploymentone customer even canceled a deployment after fully completing solution qualification. Morgan Stanley still sees OCS as an opportunity for Lumentum and Coherent to boost margins, but believes that while supplying the largest implementer, Lumentum will capture most of the value in the near term. Stock preferences: KEYS benefits across all paths, LITE/COHR draw the most attention Morgan Stanley's core preference continues to favor Keysight (KEYS.US): regardless of which implementation path CPO/NPO ultimately takes, optical growth will drive test demand, making Keysight a beneficiary "not dependent on the end-point path"; Corning Inc (GLW.US) is grouped into the same "benefits no matter which path" category. The report said "we have been very explicit in our positive view on KEYS." The report's view on LITE and COHR: although both will likely remain sold out for the foreseeable future amid a persistent InP laser shortage, they will still command the most attention; Coherent's (COHR.US) PhotonLink integration platformoffering end-to-end delivery for hyperscalers that want to stitch together products from more than six suppliers into an open solution but lack the integration capability themselvesis seen as particularly well suited to this need, and the company disclosed it has signed an LTA (long-term agreement) with a customer for an NPO solution, with ramp starting next year. Lumentum (LITE.US), though it did not meet with Morgan Stanley at the conference, had previously said it expects to announce an NPO-related LTA in the coming months. Ciena (CIEN.US) has multiple paths to success, but to significantly outperform its stated targets, the InP supply chain needs to loosen further in the coming years; and Cisco Systems, Inc. shows no sign of demand weakness, while a more controllable supply chain instead gives it the opportunity to keep expanding its revenue base from cloud customers. Morgan Stanley maintains its In-Line view on the telecom and networking equipment industry. According to the research report's price targets, Lumentum at $945.67, Coherent at $310.39, Keysight at $347.32, and Ciena at $368.56; on ratings, LITE, COHR, GLW and CIEN are all Equal-weight, while Keysight and Cisco Systems, Inc. (COCS.US) are Overweight. Despite hot fundamentals, the rally has recently come under pullback pressurebut Morgan Stanley did not adjust any ratings in these notes, with its conclusion resting on the technical picture: optical content continues to grow, solution form factors remain undecided, and the supply chain is broadly tight, "a positive for nearly everyone in the industry."