Goldman Sachs Report: Optical Networking Is the Next Mega Trend in AI Infrastructure

Key Takeaways

• Goldman forecasts $154 bn optical networking market by 2028.
• Scale‑up AI clusters account for $106 bn (69%) of total TAM.
• Coherent optics, CPO and pluggable modules drive most growth.
• Coherent, Lumentum, and Fabrinet identified as top beneficiaries.
• Fiber‑optic interconnects become critical to overcome data‑center bandwidth bottlenecks.

Pulse Analysis

The surge in generative AI and large‑scale machine‑learning models has shifted the performance bottleneck from compute chips to the data‑movement fabric that links them. As GPUs, TPUs and emerging chiplet‑based processors multiply within racks, traditional copper links hit latency and power walls, prompting a migration to fiber‑optic interconnects. Goldman Sachs quantifies this shift, estimating a $154 billion total addressable market for optical networking by 2028, with the majority of spend tied to scaling up AI clusters rather than expanding out to edge sites.

Goldman’s forecast distinguishes two growth engines: scale‑up architectures that stack more chips per rack, and scale‑out designs that add more racks to a cluster. Scale‑up accounts for $106 bn (69% of the TAM) while co‑packaged optics (CPO) alone could capture $91 bn (59%) as manufacturers embed photonic transceivers directly onto compute boards. The demand is not limited to long‑haul links; it now permeates every layer of the data‑center stack, from rack‑to‑rack backplanes to intra‑rack pluggable modules. Suppliers that can deliver higher bandwidth per watt, tighter form factors, and simplified packaging will win contracts from hyperscale cloud operators racing to meet AI compute demand.

For investors, the report signals a strategic pivot toward photonics‑heavy portfolios. Companies such as Coherent, Lumentum and Fabrinet sit at the heart of the supply chain, providing lasers, modulators and precision assembly services essential for high‑speed coherent optics. Their exposure to CPO and advanced pluggable modules positions them to benefit disproportionately from the projected spend. As AI‑driven capex accelerates, traditional telecom optics players may see slower growth, while data‑center‑focused silicon‑photonic firms could experience a multi‑year earnings uplift, making optical networking a compelling thematic investment through the late 2020s.