After just one night, the market sentiment has completely changed!

This morning, the "super dark horse" optical module stocks - Zhongji Innolight, Eoptolink, and T&S Communications - collectively plunged. Yesterday's top-performing ChiNext Index and 5G Index all weakened across the board. Meanwhile, overseas computing power leaders Oracle and NVIDIA also declined collectively last night.

On the market front, Morgan Stanley released a research report that struck suddenly last night. The bank stated that stock prices have seen significant gains over the past few months. Most of the positive fundamental factors have already been reflected in prices. They recommend taking profits while consensus sentiment remains optimistic.

However, not all major banks share the same view as Morgan Stanley. Although some ASICs (Application-Specific Integrated Circuits) may face volatility in the short term, considering the clearer strong demand outlook for 2027, Citi believes the overall narrative remains compelling. Optical module companies are expected to receive valuation re-rating, with price-to-earnings ratios above 20x being reasonable.

**Research Report Strikes**

The collective decline of super dark horses has dampened market sentiment to some extent. This morning, three leading optical module stocks suddenly plunged, with Zhongji Innolight falling over 6% at one point, Eoptolink down over 7%, and T&S Communications dropping over 8% before all narrowing their declines.

Last night, Morgan Stanley's research report on optical module profit-taking went viral, likely being the main reason triggering the industry upheaval. The bank believes all transceiver inventories have risen significantly over the past few months. Due to accelerated delivery of high-end GPUs, market sentiment toward transceiver shipments has become more positive. Meanwhile, confirmed new orders from key customers have made recent market sentiment more optimistic.

Even companies experiencing earnings declines in the first half of 2025 have significantly outperformed relevant indices. Optimism about AI infrastructure has extended to all companies with related revenue exposure. Taking ZTE as an example, despite its first-half earnings declining 12% year-over-year, its H-shares have risen 49% year-to-date. UCloud's earnings fell 22% in the first half, yet its H-shares have surged 319% year-to-date, mainly benefiting from its high-end optical fiber products that may have important applications in AI infrastructure.

Since April, Eoptolink has gained as much as 460%, Zhongji Innolight up 312%, T&S Communications up 269%, and Huagong Tech up 62%.

Morgan Stanley's cautious stance is mainly based on valuation considerations. The institution's analysis shows that Eoptolink and T&S Communications' valuations have exceeded historical +1 standard deviation levels, meaning fundamental positives have been at least partially digested. In comparison, Zhongji Innolight's current valuation is below the +1 standard deviation level.

From a valuation change perspective, since early 2025, Zhongji Innolight's forward P/E ratio has risen from 14x to 24x, while Eoptolink's increased from 8x to 20x. Morgan Stanley believes current market consensus already views Eoptolink as the world's second-largest manufacturer with the best gross margins, limiting further upside potential. Additionally, after achieving 338% annual earnings growth in Q2 2025, growth rates in coming quarters are likely to decelerate significantly, more likely triggering rating downgrades.

The bank maintains an overweight rating on Zhongji Innolight with a target price of 435 yuan. As a pioneer in 1.6T new products, the company is expected to achieve significant growth in 2026, positioned better than industry peers. However, they downgraded T&S Communications to underweight with a raised target price of 142 yuan. The company's earnings growth potential has been reflected in current share prices, with valuations exceeding +1 standard deviation levels.

Morgan Stanley also maintains its underweight rating on Huagong Tech, believing the company has relatively weaker fundamentals and more expensive valuations compared to industry peers. Meanwhile, they raised target prices for Yangtze Optical Fibre and Cable and ZTE while maintaining respective ratings, as performance fundamentals haven't reached inflection points, but stock price gains already reflect potential positives.

**Different Voices**

However, there are different voices regarding optical modules.

Citi holds a constructive view on optical modules, mainly supported by the following factors:

First, Broadcom's optimistic expectations for ASIC growth.

Second, Meta and OpenAI's positive outlook on long-term capital expenditures, along with Oracle's massive data center construction plans and strong backlog of contracted orders, all indicating enhanced demand visibility beyond 2026.

Third, optical module market scale expansion and growth in the optical-electrical co-packaging total addressable market, with next-generation ASICs potentially adopting LPO technology, followed by possible introduction of OIO. Although stock prices have risen significantly year-to-date, profit-taking seems inevitable.

However, despite some ASICs potentially facing short-term volatility, considering the clearer strong demand outlook for 2027, the overall narrative remains compelling. Optical module companies are expected to receive valuation re-rating, with P/E ratios above 20x being reasonable.

On August 26, a Goldman Sachs research report suggested that despite recent significant price increases for Eoptolink and Zhongji Innolight, both companies' valuations remain reasonable. Based on stock prices at the time, Goldman Sachs calculated 2026 expected P/E ratios of 19x and 23x for Eoptolink and Zhongji Innolight respectively, basically consistent with both companies' historical averages since 2021 (19x/22x). Goldman Sachs also raised EPS expectations for both Zhongji Innolight and Eoptolink for 2025-2027 by 3% to 38%.

Notably, yesterday the market began circulating a computing power "Surrender Letter Urging Liquor Veterans," which based on historical patterns may indicate that related sector sentiment is at a cyclical high point.