AI demand is racing ahead so fast that the next big bottleneck may not be chips, but the materials that help data move inside the system. Lumentum CEO Michael Hurlston says indium phosphide, or InP, could become scarcer than memory, and that warning is starting to ripple through the entire AI hardware chain. The real pressure point is not just one company or one product, but the fragile supply line behind lasers, optics, and the guts of modern data centers.
Hurlston’s comments landed at a time when investors are already watching every corner of the AI buildout for weak spots. His point was blunt: the industry is asking suppliers to solve a tougher problem, at a much larger scale, than most people realize. When the people closest to production are saying demand is outrunning supply, that tends to get the market’s attention fast.
InP matters because it is a compound semiconductor that emits light, which makes it essential for the laser systems used in high-speed networking. That includes the lasers inside AI datacenter transceivers, pump lasers that feed optical amplifiers, and co-packaged optics engines sitting right next to powerful GPUs. In plain English, if the AI world wants more speed and less bottlenecking, it needs a lot more of this material.
The scale here is what makes the situation different from older telecom cycles. Hurlston said legacy customers may have used lasers in the hundreds, while AI infrastructure is pushing toward the hundreds of millions. That kind of jump is brutal for any supply chain, but especially for a non-silicon material that has to be ramped carefully and manufactured with real precision.
Lumentum’s own numbers show why this story has legs. The company reported Q3 FY2026 revenue of $808.4 million, up 90.1% from a year earlier, while non-GAAP operating margin widened to 32.2%. Hurlston also said the supply-demand imbalance is now greater than 30%, and that some key components are effectively sold out for the foreseeable future.
That kind of shortage is a double-edged sword. It can help suppliers with pricing power and revenue growth, but it also exposes just how stretched the ecosystem has become. When customers are moving faster than factories can ramp, the winners are often the ones who already control scarce capacity or can fund it quickly.
NVIDIA is one of the biggest names linked to this story, and not just because it is driving AI demand. Hurlston noted that NVIDIA invested in Lumentum and also in one of its largest competitors, Coherent, which has serious InP manufacturing capability. That matters because NVIDIA’s money is not just a vote of confidence, it is also a sign that the AI leader knows where the real choke points may be.
Coherent has been moving aggressively to expand its position, with plans to double internal InP output by the end of 2026 and then more than double again by 2027. Its Datacenter and Communications segment now makes up 75% of revenue, a huge shift from 41% a year ago. That kind of mix change tells you exactly where the demand is coming from and why the market is suddenly so focused on optics instead of just GPUs.
AXT is another name tied to the same pressure wave, but from the substrate side. The company raised $632.5 million to build out InP capacity at Tongmei, and management has warned that capacity will become a critical enabler. Then there is Applied Optoelectronics, which reported Q1 datacenter revenue of $81.4 million, more than double from a year earlier, showing how broad the demand surge has become.
The strange part is that the stocks tied to this theme have not exactly been celebrating lately. Lumentum, Coherent, AXT, and Applied Optoelectronics all sold off sharply over the last month, even though the business backdrop remains intense. That disconnect is what makes the current setup so interesting, because the tape can turn one way while the supply story keeps tightening underneath it.
Investors are now stuck balancing two very different pictures at once. On one hand, the AI buildout keeps demanding more optical power, more lasers, and more specialized materials than ever before. On the other hand, the companies supplying that chain are still dealing with real manufacturing limits, and those limits are not the kind that disappear just because sentiment gets shaky.
