Light-based data connections are replacing copper wiring inside AI data centers, and the stocks tied to that shift have been among 2026's biggest winners.

A proposed US ban on Chinese optical hardware sent shares surging again recently. But the supply chain underneath these stocks still runs through Beijing, and that problem isn't going away.

Why optics became the AI trade

Copper wiring hits a hard physical limit inside large data centers. Push data fast enough and the signal degrades within a meter or two, while power consumption climbs.

Optical networking transmits data using pulses of light through fiber-optic cables, which is faster, more energy-efficient, and works across longer distances.

NvidiaNVDA

has committed at least $6.5B to photonics companies since March, including stakes in CoherentCOHR

and LumentumLITE

.

Goldman Sachs projects the total addressable market for optical networking will grow from roughly $15B to $154B between 2026 and 2028.

Lumentum's CEO has said that telecom buyers used to order lasers in the hundreds. Nvidia and cloud giants now want hundreds of millions. Between Lumentum and Coherent, he said, the two companies can't service the demand.

The FCC ban and who it helps

On Aug. 4, Reuters reported that the Federal Communications Commission is drafting a rule to ban imports of Chinese optical transceivers from US data centers. The ban isn't final and could still be modified or dropped.

Marvell TechnologyMRVL

, Coherent, Lumentum and Applied OptoelectronicsAAOI

all saw double-digit gains on the news.

The primary target is Zhongji Innolight, which holds roughly 27% of the global market for AI transceivers and generated 62% of its revenue from the US in the first quarter of 2026.

Jefferies pushed back on the euphoria, noting in a research note that it sees a low risk the ban materializes under the Trump administration and believes it may be a negotiating tactic ahead of a planned visit by President Xi.

Beijing's existing control over the supply chain

The FCC ban story grabbed attention, but a different Chinese control mechanism is already in force and gets far less coverage.

In February 2025, Beijing issued Announcement No. 10, placing indium-phosphide wafers under export licensing. Indium-phosphide is the semiconductor crystal that high-speed lasers are cut from.

That rule was never suspended under the US-China trade truce that took effect in late 2025. It has no expiration date and remains fully active. Since those controls began, the price of a six-inch indium-phosphide wafer has jumped 250%.

AXTAXTI

, which grows the crystals in China and ships them for laser production, needed permits in June and August 2025 before it could ship at all. Coherent's CEO flew to Beijing with President Trump recently to raise licensing delays directly.

China refines roughly 70% of the world's indium, the key input for these wafers. Outside China, refining plants run well below capacity, but ramping them takes time.

Three tiers of exposure

Sorting optical companies by who actually controls the scarce inputs reveals three distinct risk profiles.

At the top is AXT, which controls its own crystal production and reported second-quarter revenue growth of 165%. That gives it more control over the supply chain, but its production still sits within China’s permitting system.

In the middle is Coherent, which produces some of its own wafers and has invested in more efficient six-inch production. Lumentum operates its own device plants but still sources crystals externally, recently committing $43.5M upfront to AXT to secure long-term wafer supply.

At the other end is Applied Optoelectronics, a transceiver assembler with no wafer production of its own. The FCC ban could give it a more protected US market, but it does little to address the company’s upstream exposure to China.

Valuations reflect much of the enthusiasm already, with Lumentum and Coherent both trading near 150 times trailing earnings.

Retail investors are also getting new ways to play the theme through Tema’s LAZR Photonics & Optics ETFLAZR

and the soon-to-launch Roundhill Photonics and Optics ETFLYTE

. So far, however, LAZR has seen limited uptake since its June 30 launch.

The optical networking boom is no secret, but the supply chain powering that growth remains far more exposed to China than investors may realize.