Like their semiconductor counterparts (Intel, AMD, Nvidia), optical and photonics companies have been riding the data center spending wave since the end of last year, a wave that is only getting stronger in a world where remote services become the norm as illustrated by the strength of their quarterly earnings and guidelines.
But contrary to them, they also have a large exposure to the telecoms industry. While this telecoms business used to be a headwind in recent years as telecom carriers held off on capex, it is finally showing signs of life with vendors such as II-VI and Inphi hinting at clear signs of acceleration in the 5G infrastructure buildout and commenting that we’re in the early stages of this ramp.
On top of this supportive environment, a new technology/product cycle around Silicon Photonics (SiPho) could act as an additional catalyst and make photonics stocks highly attractive in the Tech universe.
SiPho is the blend of semiconductors (integrated chips) with optoelectronics (lasers for example). Over the past years, the whole semiconductor industry, starting from chip design software companies to equipment manufacturers (lithography, etching….) have worked together to make this technology commercially viable. After several false starts and with most of the technological issues now resolved, Silicon Photonics is just entering into its golden age and will benefit from a tremendous multi-year demand cycle, that could trigger further M&A after the recent Nvidia acquisition of Mellanox.
High-speed communication networks, like Internet, rely on fiber-optic interconnections mainly because light travels at a higher velocity than electricity. Despite their unparalleled physical speed advantage, even optical communication techniques are starting to reach their limits in the face of an exponential growth in demand for bandwidth. The massive rollouts of 5G wireless networks and their data hungry accompanying services (autonomous cars for example) will further exacerbate this problem.
So far, component and equipment manufacturers as well as telecom operators across the world have relentlessly pushed the boundaries by adding more fiber strands, squeezing more wavelengths into their equipment and/or using more efficient modulation schemes. However, many bottlenecks still need to be removed in order to deliver the necessary transmission speed and latency to reach the goals of a fully digitalized economy.
Enter Silicon Photonics. Most of the telecom optical equipments are still hand-assembled (high alignment precision is needed) with discrete photonic components. Thus, being able to directly integrate the semiconductor and the optical parts into a single chip by using traditional semiconductor processing techniques is a huge improvement.
First, it will allow mass-production and hence significantly reduce the costs. This is crucial when considering that the largest buyers, hyperscalers like Google or Facebook, are ordering each year thousands and thousands of optical interconnect solutions for their data centers.
Second, it will allow breaking new speed barriers due to shorter distances (everything is processed inside the chip), less time-consuming opto-to-electro conversions and enable very complex modulation patterns.
In addition to telecom/networking, SiPho also has a bright future in other fields. In computing, Intel and many others are working on all-optical microprocessor prototypes, the holy grail of computing! SiPho may also be very useful in advancing and miniaturizing quantum computers. Integrating lasers onto silicon chips will also dramatically improve the light sensors (LIDAR) of autonomous vehicles and potentially revolutionize medical diagnosis.
Given its disruptive potential, the Silicon Photonics’ technology is an obvious key investment theme in our Smart Connectivity certificate.
