Transcript | Photonics w/ Tema
Transcript of 8/13/26 space on X covering photonics.
The following is a transcript of today’s conversation on X, in a space hosted by Yuri Khodjamirian of Tema ETFs, Arvind Srinivas, and P Equity Research.
To check out Arvind’s substack, please click here.
To listen to the audio recording of this space, please click here.
Summary:
Introduction & Participant Backgrounds
Host (PJ / P Equity): Operates a channel/Spaces focusing heavily on semiconductors and information sharing. Notes that optical tech has been heavily trending and serves as the primary moderator.
Arvind (Retail Investor): A retail investor with a day job and a decade of investing experience. Converted from an AI/semiconductor skeptic a year prior to a dedicated bull due to undeniable anecdotal evidence.
Yuri Khodjamirian (CIO, Tema ETFs): Manages an institutionally focused ETF provider with roughly $4 billion in AUM. Tema launched the LAZR ETF (focused on photonics and optical tech), which partners exclusively with SemiAnalysis as an independent research provider.
InP (Indium Phosphide) Supply Chain & Bottlenecks
Indium Metal Realities:
~70% of global indium is produced in China as a byproduct of zinc refining (China controls about 50% of global zinc-smelting capacity).
However, indium metal itself is not where the true bottleneck lies; it is a relatively low-value commodity mostly consumed by touchscreens, with optical substrates using only a tiny fraction (a few grams per wafer out of ~1,100 tonnes of global output).
The Real Crystal/Substrate Choke Point:
The actual bottleneck is in InP crystal and substrate growth, controlled globally by essentially three players: AXT (~40%, an American holding company with furnaces/producers in China), Sumitomo (~40%, Japan), and JX Advanced Metals (~10%, Japan).
Japan represents roughly 50% of supply, serving as a critical Western-aligned fail-safe if geopolitical export controls tighten. JX is scaling capacity significantly toward 2030, and SemiAnalysis projects China dependence will drop sharply post-2028.
InP has no viable substitute at scale because it uniquely emits the exact wavelengths required to minimize signal loss in fiber optics.
Co-Packaged Optics (CPO) & Adoption Timelines
The Limits of Copper: Copper interconnects are hitting physical limits (at roughly 448G per lane) due to resistance, heat, signal degradation, and lack of pin/connection space at the edge of high-performance AI chips (like NVIDIA GPUs).
The Transition Roadmap:
Near-Packaged Optics (NPO): Serves as an initial bridge technology.
Scale-Out CPO: Expected to ramp around 2027 alongside NVIDIA’s Rubin Ultra architecture for rack-to-rack connections.
Scale-Up CPO: Expected around 2028 with the Feynman architecture for inside-the-rack connections.
Adopter Breakdown:
Meta and NVIDIA are expected to be the earliest industrial adopters of CPO.
Google and Microsoft are anticipated to stick with pluggable optics longer.
Amazon may leverage NPO as a hybrid stepping stone.
Timing vs. TAM: Minor timeline shifts (e.g., pushing timelines out by a year) do not materially hurt long-term discounted cash flows (DCFs) given Goldman Sachs forecasts projecting a roughly 15x increase in the optical Total Addressable Market (TAM) for AI.
Execution Risks & Market Pricing (The AAOI Case Study)
Execution Hurdles: Ramping production by multiples of current capacity creates severe operational challenges across MOCVD manufacturing equipment, lasers, and wafers. Companies like Lumentum report being completely sold out through 2028 despite quadrupling capacity.
Market Inefficiency & Mispricing:
Applied Optoelectronics (AAOI) needs to triple capacity by the end of 2026 and double it again in 2027, and it is currently tracking ahead of schedule.
Despite this, the stock market heavily discounts the company (trading at roughly 10x forward estimates looking to 2028) due to a backward-looking reputation marred by historical cyclical downturns (past transceiver booms, COVID, etc.).
This disconnect presents a classic market mispricing opportunity where institutional and retail investors fail to price in a fundamentally changed operating environment.
Geopolitics & Macro Industry Shifts
Geopolitical Pressures: Export licensing hurdles (such as AXT’s permit requirements) and transceiver bans create recurring friction, making Japanese supply and domestic U.S. production (e.g., AAOI) strategic assets.
Order of Magnitude Shift: Legacy telecom markets historically bought tiny handfuls of lasers, whereas modern AI data center infrastructure requires hundreds of millions of lasers, changing the fundamental demand profile of the entire photonics sector.
Questions:
In terms of optical supply and demand — InP specifically — how tight are conditions? I have sources that say the supply of indium outside China is enough, but the real bottleneck is crystal growth. Is that the case?
What do you see the adoption rate looking like? It seems late 2027 or 2028 could be high volume, while CPO is still low volume today — especially for scale-up CPO. Who do you see as the early adopters when that time comes?
You mentioned that demand isn’t really in question, but timing may be the key variable. Is it just a matter of when? In other words, do you see execution risks in CPO or NPO? For what it’s worth, they haven’t yet been adopted at industrial scale. What kinds of execution risks do you foresee?
Circling back to the first question: I understand that indium metal itself may not be as big a bottleneck as it’s made out to be, but reliance on China is inescapable. Considering geopolitical tensions, is there a way around it? Are there alternatives being pursued — through agreements or technological redesign, designing around it? Is anything happening at an industry level, and how advanced is it?
[04:35] P Equity Research — Welcome
Welcome to our Space, everyone. I think more people will join as we continue. I’m PJ from P Equity. We have Arvind and Yuri from Tema ETFs, and we’re going to talk about photonics today. We’re going to ask some questions and basically develop a base-level knowledge regarding photonics.
We’ll start with introductions, briefly explain what we do, and then go forward with the questions. You obviously know me — you’ve attended my Spaces and follow me. I post a lot about semiconductors and information in general. Optical has been trending a lot, so I’ve been posting quite a bit about optical. That’s my side — I just post and share information, and I’m excited to see what kind of information we can generate from this Space.
Arvind, maybe you can go next, and then we’ll hand it to Yuri.
[05:36] Arvind — Introduction
My name is Arvind. I’m relatively new to Spaces. I’m a retail investor who has a day job, but I’m really passionate about investing, and I’ve been investing for the last decade or so.
On AI and semis, I was one of those people who was skeptical a year ago, but the anecdotal evidence became too hard to deny. So here I am, one of those people converted into an AI/semi bull. I love investing because it’s a hobby and a passion for me. I’ll hand it over to you, Yuri.
[06:25] Yuri — Introduction
Thanks, everyone, for joining. My name is Yuri Khodjamirian, and I am the Chief Investment Officer at Tema ETFs. We are an institutionally focused ETF manager, and we recently launched our photonics and optical ETF. The ticker is LAZR.
We’ve been researching and investing in the photonics space for quite a long time. I even remember looking at some of these companies well before the revolution in AI.
Tema manages several different ETFs and about $4 billion under management. We have ETFs focused on memory and space, and we pride ourselves on building good universes, taking a thoughtful approach to the companies within them, and doing deep fundamental research — especially in some of these more technical areas. I’m excited to get started and dig into the topic.
[07:25] PJ — Question 1: Where is the real InP bottleneck?
Let’s get into the questions. I’ll begin with mine, then hand it to Arvind, and we’ll deliver closing remarks at the end.
A lot of people have been talking about indium phosphide, including me. In terms of optical supply and demand — InP specifically — how tight are conditions? I have sources that say the supply of indium outside China is enough, but the real bottleneck is crystal growth. Is that the case?
[08:02] Yuri — Indium metal versus InP crystal/substrate supply
It’s a really interesting question. For people newer to the space: to create photonics and optical equipment, you need materials different from the silicon used to create other semiconductors. One key material is InP — indium phosphide.
Right now, we have one of the most exciting booms our generation has seen in the AI capex buildout. All of that will require a lot of optical equipment, and that equipment has to be supplied. Suddenly, you’re seeing a surge in demand and a tighter supply situation.
If we break down the supply situation: around 70% of indium is produced in China. It’s a byproduct of zinc refining, so you need zinc smelters, and not all zinc smelters have an indium-recovery unit. About 50% of global zinc-smelting capacity is in China, and China effectively controls around 70% of indium supply.
But indium is a relatively low-value product. The amount that goes into substrates to produce InP components is basically a rounding error: a few grams in a wafer, versus perhaps 1,100 tonnes of global output. So the 70% China share people talk about sounds scary, but that’s not really where the bottleneck is. Indium is mostly used in touchscreens, where it has useful properties.
As you said, the real bottleneck is in the crystals. I’ll use “InP crystals” and “InP substrates” somewhat interchangeably. That market is controlled by roughly three companies: AXT, which we own in our LAZR ETF; Sumitomo in Japan, a large conglomerate; and JX Advanced Metals. Between them, they roughly control the market: around 40% AXT, 40% Sumitomo, and 10% JX Advanced Metals, with the rest held by smaller suppliers.
AXT is interesting. It’s an American holding company, but it owns an InP producer in China. Its furnaces used to grow these crystals are basically in China. Japan also has about 50% of supply through Sumitomo and JX. The key issue is this supply chain, and there are risks if China starts limiting exports. The more Western-aligned supply comes down to the Japanese; Japan is a key part of this.
Another way to think about it is pricing. Substrates are a small part of the total average selling price of transceivers. If substrate prices rise, that can incentivize more supply — and customers such as NVIDIA will be willing to pay more.
The other important point is that there’s basically no substitute here. InP produces exactly the wavelengths of light needed to minimize loss in fiber optics. This is what goes into these data centers. There may be other types in some cases, but there really isn’t a substitute at scale.
One major optical/photonics bull case is that we’ve mainly used copper for these data connections, but copper is starting to hit its physical limits. We’re trying to transfer so much data, over distances that make optical essentially the only solution. Demand is growing.
So where are the supply choke points? Crystals are one, but there are sources of supply. Even if China restricts InP exports, around 50% of supply is still in Japan. The way we think about it is: the bottleneck is real, but there are many other bottlenecks down the supply chain — wafers, equipment used to make the lasers, and other stages. You have immense demand growth, and when you analyze the supply situation it becomes precarious. That’s one reason we’re so excited about the space.
[12:36] PJ — Question 2: CPO timing and early adopters
That makes a lot of sense. So it isn’t just the raw substrate; it’s also the different parts of the supply chain — the equipment, wafers, lasers, and so on.
My second question is about co-packaged optics. What do you see the adoption rate looking like? It seems late 2027 or 2028 could be high volume, while CPO is still low volume today — especially for scale-up CPO. Who do you see as the early adopters when that time comes?
[13:18] Yuri — CPO, NPO, Rubin Ultra and Feynman
It’s an interesting question and one of the big debates in optics. It illustrates why this theme has long structural growth ahead.
The computing power of NVIDIA GPUs has increased so much that all the surrounding components must be upgraded to keep up. A key component is how quickly data can be moved around within the data center. We’re trying to push copper to its maximum, but it’s hitting its limits.
When you increase bandwidth and the number of lanes, copper can’t keep up. There are many technical reasons. Even literally at the edge of a chip, there aren’t enough connections to connect all these things.
One solution is to bring fiber-optic cables and optical components closer and closer to the chip: first onto the circuit board, and eventually integrated into the chip itself. That’s what co-packaged optics, or CPO, is.
It’s already being used in scale-out. Broadcom and NVIDIA have products on the market — switches using CPO. But what you mentioned, scale-up, is where the roadmap debate becomes interesting.
Scale-up CPO is a Rubin Ultra and Feynman story — the next generations on NVIDIA’s roadmap. The roadmap is first CPO around Rubin Ultra for connections between racks, a 2027 story, and that is a powerful growth story on its own. Then you get to inside-the-rack scale-up with Feynman, the next generation, which — as you said — is a 2028 story. This is where copper faces challenges at around 448G per lane.
NVIDIA hasn’t said anything definitive about the architecture, so much of what we’re discussing is still market conjecture. What we like about the photonics chain is that there are multiple bridges. With Rubin Ultra, you have NPO — near-packaged optics — as a bridge. Even if CPO arrives later because of manufacturing challenges, there are other growth drivers in the meantime as data centers integrate optics as closely as possible.
As some listeners may know, we partner with SemiAnalysis on the ETF. They’re an exclusive research provider and research partner for us. They’ve pushed back some of their CPO timelines.
Rather than focusing only on exact timing — and I’ve been investing for many, many years — investors should focus on the size of the opportunity. If you look at the overall DCF, a one-year shift doesn’t matter much when the addressable market is this large. For context, Goldman’s forecast has the optical TAM for AI going up something like 15 times. There will be debate about an architecture that isn’t fully defined yet, but it doesn’t affect near-term DCFs as much as people think.
We think the earliest adopters of CPO will probably be Meta and NVIDIA. Google and Microsoft will probably stay with pluggable optics for a while. Others such as Amazon may start by using NPO as a bridge between the two.
[17:13] PJ — Handoff
That’s excellent — a great explanation. Arvind, I’ll hand it to you for your questions.
[17:27] Arvind — Question 3: Is adoption only a matter of timing?
Thanks, PJ, and thanks, Yuri, for answering those questions.
You mentioned that demand isn’t really in question, but timing may be the key variable. Is it just a matter of when? In other words, do you see execution risks in CPO or NPO? For what it’s worth, they haven’t yet been adopted at industrial scale. What kinds of execution risks do you foresee?
[18:01] Yuri — Execution risk, pricing and AAOI’s capacity ramp
A lot of these bottleneck or AI-buildout themes require understanding demand: how many lasers will go into data centers, getting a real understanding of overall demand, and thinking far into the future.
The second part is supply, and the two interact. They interact through pricing, but also through execution, because the companies we invest in ultimately have to deliver and execute on their targets.
Ramping supply is always challenging — especially when we’re talking about multiples of current capacity. Investors may see execution challenges only as a problem, but if the constraint exists across the industry, it can drive pricing and make the environment better for all companies.
We invest in companies where execution is very important. The demand picture is there, but they need to execute. Take AAOI [Applied Optoelectronics], which we own in the fund. It needs to increase capacity by more than three times by the end of 2026 to hit some targets, then double again in 2027. It’s ahead of schedule.
The interesting thing — and where the stock market can be such a great place to invest — is that the market isn’t pricing it to succeed. Despite strong demand and the fact that it’s ahead of schedule, the market is effectively saying, “No, these guys aren’t going to succeed.” Looking to 2028, the stock is on around 10 times, and the estimates themselves are conservative.
The market is offering an opportunity but handicapping the company because it is backward-looking. This company has a checkered history of delivering into previous transceiver booms — the earlier cloud boom, COVID, and so forth — and it has a bad reputation because of that.
But there is now evidence that it may be able to deliver. For us, the questions are: Does the company show evidence of delivery? Is the environment different this time? What is the strategic value of the business?
This is a vertically integrated company with U.S. production. All the recent noise around China — which I’m sure we’ll discuss as well — creates value for it; it is a major beneficiary. So the market is already looking at some of these companies and pricing in execution risk.
[21:00] Arvind — Question 4: China dependence and alternatives
Even yesterday, Coherent was saying it plans to double its InP capacity twice over the next 15 months. As an observer who isn’t part of the daily grind, it’s difficult to absorb all the numbers being thrown around for these ramps, so naturally these questions come up.
Circling back to the first question: I understand that indium metal itself may not be as big a bottleneck as it’s made out to be, but reliance on China is inescapable. Considering geopolitical tensions, is there a way around it? Are there alternatives being pursued — through agreements or technological redesign, designing around it? Is anything happening at an industry level, and how advanced is it?
[22:04] Yuri — Export controls, Japanese supply and broader bottlenecks
This is a very interesting situation, and I touched on it a little already. China does control some of these things. Take AXT: it has to apply for export permits every time it tries to get crystals out.
We covered that indium metal itself isn’t the problem. The problem is crystals and substrates. But around 50% comes from Japan, and Japan is capable of delivering these materials, so there are fail-safes.
I don’t think anyone can say China won’t use this geopolitically. It has happened in the past and can happen again. China can restrict exports, but 50% of supply remains in Japan, and capacity is expanding. JX is looking to expand capacity by something like 20 to 30 times by 2030. When we talk to SemiAnalysis, they think dependence on China will be much lower after 2028 than it is today. That should ease some of the situation.
But it is a risk. A more recent China-related issue has been the ban involving transceivers, which is quite disruptive — I’m sure we’ll talk about that as well. There are geopolitical angles to understanding supply and demand.
As I said before, bottlenecks are everywhere. There are bottlenecks in machines and MOCVD equipment. I was listening to Lumentum, as I’m sure many people were, and the message was basically: “We’re sold out through 2028 despite quadrupling capacity.” That’s the kind of market we’re in with optics.
[24:02] Arvind — Closing handoff
Thanks. One key question has always been whether the constraint is so intense that it hinders photonics implementation, or whether it’s just one more manageable issue. Now that you’ve clarified that the situation may improve toward or after 2028, that’s reassuring.
I’ll hand it back to you, Yuri, for final remarks, and then to PJ for closing.
[24:28] Yuri — Final remarks
We’ve dived quite deeply into several core areas, so it may help to step back and think about the overall photonics and optical opportunity and how different companies might benefit.
I highly recommend an interview with the Lumentum CEO; he laid out the different opportunities ahead very well.
This industry historically served industrial and telecom markets that didn’t grow very much. Over the last couple of years, enormous growth in AI — and the need to move data quickly — has caused the optical industry to take off.
You have supply-and-demand imbalances benefiting different companies in different ways. This is a genuine bottleneck: supply chains are difficult to ramp at this pace, creating positive pricing and significant potential for these businesses.
It’s often difficult for investors to grasp the scale. The demand picture is there. The Lumentum CEO described old telecom customers as buying only a handful of lasers, whereas now, looking at AI racks, the potential is in the hundreds of millions. That’s the order of magnitude we’re discussing.
As you move through the technology evolutions toward CPO, optics will become embedded in the chips and change the industry’s dynamics. That’s why this space is so interesting. It started from a weak demand picture and therefore a weak supply picture. Now supply has to ramp, and these cycles often last much longer and become much bigger than people expect.
There are also other businesses in the LAZR portfolio that we didn’t discuss today and that stand to benefit: companies making the equipment used to make lasers, companies selling transceivers, and the entire supply chain that has to mobilize to deliver this — just as it does for other components in the AI capex buildout. For us, it’s a very interesting time to be investing in the space.
[26:38] PJ — Closing
That’s awesome. I think we’ve had a strong conversation about InP, and hopefully people were able to learn something. It’s definitely a trending topic and will be discussed for the next few years as we transition away from copper.
Thank you, everyone, for joining. We intend to do more Spaces like this in the future. We’ll see if we can potentially get SemiAnalysis on as well, which would be great.
Thank you for your time, everyone, and thank you, Arvind and Yuri. It was great. I think everyone got to learn something from this.
[27:25] Arvind — Thanks
Thanks, PJ, for hosting. Thanks a lot, everybody, for joining.
[27:41] Yuri — Article and fund link
Thank you so much. If people want more information, we recently co-wrote an article with PJ that’s published on our website. If you go to temaetfs.com/insights, there’s more information there, and you can also find information about the LAZR ETF and its holdings.
Thanks very much, everyone. Have a nice rest of your day. Bye.