Hoping for OCP to rise? Damo warns: The architecture dispute may come to an end, and short-term catalysts in the optical communications industry have been priced ahead of schedule

The Zhitong Finance App notes that the annual Open Computing Project (OCP) Global Summit will kick off next Monday. As the most powerful “weather vane” conference in the field of data centers and AI networks, this year's OCP is highly anticipated — whether hyperscale cloud vendors can provide clear answers to next-generation AI network architectures, and whether the NPO/CPO (Near Package Optics/Co-packaged Optics) commercial schedule can be implemented will directly determine the future direction of the entire optical communication and network equipment industry chain.

Morgan Stanley made a judgment in the newly released OCP forward-looking report: the conference is expected to “turn the clouds” in the direction of AI network design, but the short-term share price impact on individual stocks may be limited.

Daimo analyst Mehta Marshall pointed out the unique value of this year's OCP. Unlike other exhibitions throughout the year, which mostly present products from a supplier's perspective, OCP is unique in that hyperscale cloud vendors will “personally drop off” and explain the direction of their architecture evolution from the customer's perspective.

Marshall anticipates that keynote speeches by giants such as Microsoft (MSFT.US), Meta (META.US), Google (GOOGL.US), and ORCL.US (ORCL.US) will be the biggest highlight, focusing on two major topics: how to find “common solutions” to common challenges such as power, cooling, cost, cabling, and ecosystem in the process of migrating to higher-speed data center networks; second, scale-up (vertical expansion) network architectures, which are currently undergoing the most intense evolution.

Damo specifically suggested that interconnect fabrics (interconnect fabrics), the trade-off between copper and optical cables, and the commercial schedule and architectural routes of CPO/NPO are expected to trigger heated debates at the conference. These three issues are the core and most divisive focus of the current AI network industry chain.

NPO/CPO: Continuing the core debate after ECOC

The report makes it clear that NPO/CPO is still the core issue after the European Optical Communications Conference (ECOC), and the commercialization schedule and implementation path are the focus. Although related discussions continue to heat up, Damo's judgment is cautious: it is expected that there will be continuous online innovation and product launches at the conference, but without more clear customer promises, the short-term catalyst for stock prices is limited.

Damo believes that supply chain expansion, increased customer adoption, and improved gross margin are the key variables driving individual stocks. In terms of target configuration, the continued preference is German Technology (KEYS.US), while Lumentem (LITE.US) and related companies (COHR.US) are considered more sensitive to the NPO/CPO route. The logic of differentiation is that, as a leading test and measurement leader, no matter which technology route wins the test requirements, it will benefit and has “route-neutral” attributes; while Lumenthum and related companies are directly exposed to the NPO/CPO landing pace game, where flexibility and uncertainty coexist.

Short-term catalysis has been “pre-priced”

It's worth being wary of, that Damo suggests the “headline risk” inherent in OCP — especially for companies like Arista Networks (ANET.US) that are deeply tied to cloud vendors. However, the report also pointed out that the sector has recorded positive performance in the past few weeks, and the rise in stock prices may have reflected the potential benefits of the conference ahead of time, which means that the space for “fulfilling expectations” may have been partially overdrawn. It rated the overall industry as “on par with the market”.

KEYS.US (KEYS.US) is the first choice in the Damo sector. It maintains an “overweight” rating, and the target price is $13.30. As a test and measurement leader, its “route-neutral” attribute allows it to benefit no matter which NPO/CPO technology path wins, making it a safe haven from AI network uncertainty.

Damo maintains the Arista Network (ANET.US) “plus” rating, with a target price of $220. Based on 47 times the expected price-earnings ratio for 2027 (or about 40 times the expected price-earnings ratio for 2028), the valuation has a premium over the Internet industry, reflecting its high growth, hyperscale data center cycle and AI opportunities, but it is closer to the optical module/AI industry. However, its customers are highly concentrated on Microsoft and Meta, posing a core downside risk.

Damo maintains a “neutral” rating between the relevant company (COHR.US) and Lumentum (LITE.US), and is regarded by Damo as a more sensitive target for the NPO/CPO route. The target price of the relevant company is based on about 28 times the FY28 benchmark EPS (about 13.3 US dollars), and Lumentum is based on 25 times the 2028 price-earnings ratio (about 40 US dollars). Both valuations have premiums over the historical range due to AI growth prospects.