February 23, 2026 05:01 AM GMT Telecom & Networking Equipment Into the Spotlight: Optical Market Opportunities Tiffany.Yeh@morganstanley.com +886 2 7712-3032 Morgan Stanley & Co. LLC Joseph Moore Equity Analyst Joseph.Moore@morganstanley.com +1 212 761-7516 Telecom & Networking Equipment The optical market is set to reach $65bn+ in our '28 base case (~30% CAGR) on the back of increasing speed/investment in AI data centers. As traditional networks reach their limits, new optical technologies are poised for a ...

Summary of Telecom & Networking Equipment Conference Call Industry Overview - The conference call focused on the **Telecom & Networking Equipment** industry in **North America** with a specific emphasis on the **AI trade** and **optical componentry** market [1][3][4]. Key Points 1. Performance Metrics - Networking returns in 2025 were concentrated in AI and optical trades, with a **100% return YTD** for optical [1]. - The overall networking universe returned approximately **55% YTD**, outperforming NASDAQ by about **35%** [3]. - AI names saw a **110% increase** in returns, building on an **85% return** from the previous year [3]. 2. AI Trade and Optical Market - The AI trade has broadened beyond semiconductor names, positively impacting infrastructure, particularly in optical [3]. - Optical components led the AI basket performance with a **155% increase** and **40% estimate revisions** [3]. - The expectation is that the AI trade will continue, especially in optical, through the first half of 2026, but selectivity will be necessary for full-year returns [4]. 3. Investment Recommendations - Upgrades were made for **MSI** to Overweight (OW), with continued OW ratings for **AXON**, **CSCO**, and **ANET** [1][4]. - Companies expected to attract excess returns from the AI trade include **GLW**, **CIEN**, **LITE**, and **COHR** [4]. - Core networking names like **CSCO** and **ANET** are highlighted as attractive opportunities due to Ethernet's growing market share [5][9]. 4. Caution on Pricing and Market Dynamics - There is caution regarding the sustainability of pricing in the optical market due to increased competition and capacity investments [4]. - If capital expenditure (capex) data points continue to be revised positively, expectations for optical names may hold throughout the year [4]. 5. Public Safety Sector - The public safety sector, particularly companies like **AXON** and **MSI**, is viewed as well-positioned for growth due to high public safety budgets and the impact of OBBBA funding [10][60]. - Despite recent underperformance, there is optimism for recovery in public safety names as demand conditions improve [10][11]. 6. Company-Specific Insights - **Cisco (CSCO)** is expected to benefit from a multi-year campus upgrade cycle and increased AI contributions, with a price target raised to **$91** [34][37]. - **AXON** is projected to maintain a durable growth opportunity with a price target of **$713**, reflecting a strong market position in public safety [50][56]. - **MSI** was upgraded to OW with a price target of **$436**, citing reasonable valuation levels and growth drivers in public safety [60][71]. - **Ciena (CIEN)** is experiencing strong demand but is currently trading at a premium, leading to a cautious outlook despite positive near-term demand [72][74]. 7. Risks and Considerations - Risks include potential tariff impacts, macroeconomic uncertainties, and the timing of public safety spending [56][71]. - The optical component market faces challenges from increased competition and supply chain issues, which could affect pricing and margins [95][96]. Conclusion The conference call highlighted a robust outlook for the Telecom & Networking Equipment industry, driven by AI and optical components, while also emphasizing the need for selectivity in investments due to market dynamics and pricing pressures. The public safety sector remains a focal point for growth, with several companies positioned to capitalize on favorable funding and demand conditions.

Core Insights - T1 Energy Inc. has made a strategic investment in Talon PV LLC, acquiring a minority equity stake in the solar cell fab developer, which supports higher-margin domestic content sales, job creation, and energy security [1][5] Group 1: Company Developments - T1 Energy is advancing its own solar cell fab project, the 5 GW G2_Austin in Rockdale, Texas, with the first phase expected to come online in Q4 2026 [2] - Talon PV is developing a 4.8 GW solar cell plant in Baytown, Texas, with commercial availability anticipated in Q1 2027 [8] - Both companies aim to produce TOPCon solar cells, utilizing advanced manufacturing techniques and quantum tunneling technology [4][6] Group 2: Economic and Regulatory Context - The projects are supported by President Trump's OBBBA and 45x tax credits, which facilitate American companies investing in domestic energy production [3] - The Texas projects are expected to reshore jobs and meet rising electrical demand driven by AI, industrialization, and residential load growth [3] Group 3: Strategic Partnerships - T1 Energy's partnership with Talon PV is aimed at strengthening U.S. solar manufacturing and building scalable, non-FEOC supply chains to enhance energy independence [7] - T1 Energy has a long-term deal with Corning Inc. for polysilicon and solar wafers, further integrating its supply chain [6]

Summary of Key Points from the Conference Call Industry Overview - The conference attended was the European Conference on Optical Communications (ECOC) held in Copenhagen from September 28 to September 30, 2025, focusing on the Telecom & Networking Equipment industry [3][4]. Core Insights - **Demand for Optical Technologies**: The demand for optical transceivers has more than doubled in the last two years, with significant growth in the Data Center Interconnect (DCI) market, indicating a long runway for demand [4][7]. - **Innovation Focus**: The industry is shifting towards "blank page innovation" to address challenges, moving away from reliance on traditional telco budgets [4][7]. - **Investment in Optical Technologies**: Hyperscalers are willing to invest in optical technologies that enhance data transmission reliability and efficiency while reducing power consumption [4][7]. - **Emerging Technologies**: Key technologies discussed include Optical Circuit Switching (OCS), Co-Packaged Optics (CPO), and thin film lithium niobate (TFLN), with OCS gaining significant traction [7][9]. Company-Specific Insights - **Ciena Corporation (CIEN)**: - CIEN is optimistic about current demand, with over a year of visibility into demand. Their Direct Out-of-Band Management (DCOM) solution, co-developed with Meta, is expected to generate significant revenue [11][12]. - CIEN's valuation is around 22-23x FY26e EPS, reflecting strong positioning in the cloud market [20]. - **Coherent Corp (COHR)**: - COHR has faced supply issues due to an EML shortage but is adjusting build plans to meet increased demand. They are optimistic about future opportunities, particularly with OCS [13]. - The company trades at a discount compared to peers, presenting a potential opportunity if execution improves [13]. - **Lumentum Holdings Inc (LITE)**: - LITE is currently benefiting from OCS adoption, which could significantly impact their valuation positively [9][12]. Market Dynamics - **Pricing Environment**: There is currently no pricing pressure in the optical space, which typically sees annual price declines of 10-15%. The ability to increase prices is noted, but caution is advised if capital expenditure slows [8]. - **Upcoming Events**: The next significant event for the industry is the Open Compute Project (OCP) show scheduled for October 13-15, 2025, which may serve as a catalyst for further developments [8]. Risks and Considerations - **Supply Chain Constraints**: The ability of vendors to meet the high demand is a critical gating item for the industry [7]. - **Technological Adoption**: While OCS shows promise, its adoption may take time due to the complexity of the technology and the need for significant architectural changes [9]. - **Market Volatility**: Potential risks include macroeconomic headwinds, pricing pressures, and the impact of tariffs on gross margins [23][26]. Conclusion - The optical communications industry is experiencing robust demand driven by advancements in AI and data center needs. Companies like CIEN, COHR, and LITE are positioned to benefit from this trend, although they face challenges related to supply chain and technological adoption. The upcoming OCP show may provide further insights and opportunities for growth in this sector.

Investment Rating - The report downgrades Ciena Corporation (CIEN) to Underweight (UW) from Equal-weight (EW) with a price target of $70, down from $73 [6][33] - Corning Inc (GLW) and Coherent Corp (COHR) have their price targets increased to $50 from $44 and $92 from $83 respectively [6][13] - Lumentum Holdings Inc (LITE) price target raised to $85 from $76 [6][13] Core Insights - The optical sector outlook is positive, driven by increasing data speed demands necessitating more fiber and optical transmission, benefiting companies like CIEN, GLW, LITE, and COHR, which have seen an average increase of approximately 80% since early 2024 [3][8] - Despite the positive revenue trajectory, margin health remains a concern, particularly for CIEN, which has limited EPS upside due to its exposure to lower-margin datacom businesses [3][4] - The report highlights that while optical names have experienced significant multiple expansions, earnings revisions have not kept pace, indicating potential risks for further valuation increases [8][18] Summary by Company Ciena Corporation (CIEN) - CIEN's revenue estimates for FY26 have increased by 5% since March 2024, but EPS estimates are down by 9%, primarily due to disappointing gross margins from its pluggables business [25][33] - The downgrade to UW reflects limited potential for positive EPS revisions, with a current P/E multiple of 25x FY26 estimates [4][33] - CIEN's earnings power is projected at approximately $3.33, with a bear case valuation of $26 and a bull case of $98 [33][65] Corning Inc (GLW) - GLW's revenue estimates for FY26 are 11% higher than in March 2024, with EPS estimates up by 23% [52] - The report maintains an Equal-weight rating, with a price target of $50, reflecting a 19x multiple on FY26 earnings [57][79] - GLW's growth is supported by its fiber business, although macroeconomic factors and tariffs pose risks [57][84] Coherent Corp (COHR) - COHR has seen a 100% increase since early 2024, with FY26 revenue estimates 5% higher than in March 2024 and EPS estimates up by 6% [47] - The report maintains an Equal-weight rating with a price target of $92, reflecting a 20x multiple on FY26 earnings [51][96] - COHR's margin recovery is noted, but the report remains cautious due to ongoing tariff uncertainties and market volatility [47][96] Lumentum Holdings Inc (LITE) - LITE's revenue estimates for FY26 are 10% higher than in March 2024, with EPS estimates up by 1% [34] - The report maintains an Equal-weight rating with a price target of $85, reflecting a 21x multiple on FY26 earnings [46][34] - LITE's valuation is considered full at a P/E of approximately 23x, given its historical trading range [37][34]