Written by: Rita
The bandwidth demands of AI data centers are propelling optical communication chip companies to new heights.
On August 25th, Morgan Stanley released a research report noting that Semtech's Q2 data center revenue reached $100 million, a 39% increase quarter-over-quarter (QoQ) and a 91% increase year-over-year (YoY), hitting a record high. This was primarily driven by continued strength in 800G FiberEdge and a faster-than-expected certification for 1.6T FiberEdge. 1.6T FiberEdge and CopperEdge are expected to account for over 50% of data center revenue in Q3. Morgan Stanley raised its price target from $175 to $195, maintaining a Neutral rating.
Data Center Demand Continues to Exceed Expectations
Demand for 800G remains strong. Industry expectations for unit shipments of 800G optical modules have been revised upward from around 50 million at the beginning of the year to 80-90 million units. The ramp-up speed for 1.6T is also faster than anticipated.
The Q3 outlook is similarly robust. Data center revenue is projected to grow 45% QoQ and 160% YoY to approximately $145 million, primarily driven by FiberEdge. There are additional growth drivers for Q4, as ACC (Active Copper Cable) is set to begin mass deployment at major hyperscale customers, forming a complementary wave alongside the optical demand for 800G and 1.6T.
Morgan Stanley has raised its full-year forecasts, expecting approximately 140% growth in data center revenue for FY2027 and nearly 70% growth for FY2028. Supply is replacing demand as the primary constraint, and the supply chain is increasing capacity to support the upside potential.
Company management noted during the earnings call that Wall Street is "overly focused on the active copper cable opportunity." The ramp-up pace for copper cable redrivers aligns largely with Morgan Stanley's model, with the true driving force remaining on the optical side.
Gross Margin Improves Rapidly, Module Business Divestiture to Bring Structural Enhancement
Gross margins are improving quickly, driven by an optimized revenue mix from the data center and LoRa businesses.
The Q3 adjusted gross margin guidance is 58.3%, a 380 basis point improvement QoQ. Excluding the module business slated for divestiture, the analog gross margin has already reached 63.9%. Morgan Stanley views this as a starting point, not an endpoint. As higher-margin products like 1.6T, CopperEdge, and photonics products increase their share, gross margins have further room to rise.
The company has announced plans to divest its module business, which is expected to bring another structural improvement to gross margins and operating margins, with a neutral impact on Non-GAAP EPS. Management will provide details of the long-term financial model at the upcoming Analyst Day.
LoRa Remains Strong, Long-Term Optical Communication Opportunities Expand
Outside the data center, the LoRa business also achieved a record high. Q2 LoRa revenue was $58 million, up 31% QoQ and 58% YoY. Q3 is expected to see another 15% growth, driven by LoRaWAN, LoRa Plus, and Amazon Sidewalk.
Longer-term, through its existing linear architecture and an expanded photonics product portfolio following the acquisition of Hiefo, Semtech is building a broader optical communication presence in NPO (Near-Packaged Optics), CPO (Co-Packaged Optics), and 3.2T fields. The timing for mass production of NPO is still pegged for 2028, but Semtech should be able to leverage its existing LPO architecture for early entry. 3.2T is set to drive higher per-unit value across multiple components including lasers, photodetectors, transimpedance amplifiers (TIAs), and drivers.
Valuation and Market Expectations
Morgan Stanley raised its price target from $175 to $195, based on 34.5x Non-GAAP EPS of $5.66. As earnings forecasts were revised upward, the target P/E multiple was lowered from 48x to 34.5x. While this multiple remains above Semtech's historical range, it is broadly in line with smaller-cap peers that also have AI exposure.
Revenue forecasts for FY2027 and FY2028 were raised from $1.408 billion and $1.683 billion to $1.529 billion and $1.895 billion, respectively. Gross margin forecasts were raised from 54.2% and 55.0% to 56.9% and 62.7%. EPS forecasts were raised from $2.90 and $3.76 to $3.69 and $5.65.
Morgan Stanley maintains a Neutral rating, citing full valuation and the need to verify execution capabilities for new data center products. However, continued outperformance in data centers and stronger-than-expected gross margin improvements could still drive further upward revisions to earnings estimates.
In the disclosure appendix of this research report, Morgan Stanley analyst Joseph Moore covers semiconductor giants including NVIDIA (Overweight), Broadcom (Overweight), AMD (Equal-weight), Intel (Equal-weight), Marvell (Equal-weight), Micron (Overweight), and SanDisk (Overweight). Overall, Morgan Stanley's ratings on AI computing-related chip companies remain predominantly Overweight.
Disclaimer
This article is Chao Xiang Research's compilation and interpretation of a third-party brokerage research report (Morgan Stanley, August 25, 2026), combined with publicly available market information. The ratings, price targets, earnings forecasts, and related judgments cited herein are the views of the brokerage analyst, representing solely the position of their affiliated institution. They do not represent the views of Chao Xiang Research and do not constitute any investment advice.
The market carries risks, and investment decisions should be made independently. This article should not serve as the basis for trading any securities.
