After months of significant gains, Morgan Stanley believes that the fundamental positives for the optical module industry have been largely reflected in stock prices, prompting the firm to adjust ratings on multiple optical module-related stocks.
According to market sources, Morgan Stanley released a research report stating that the sector's fundamental positives are widely known and fully reflected in stock prices, recommending investors to moderately take profits while market sentiment remains elevated. This view sharply contrasts with Goldman Sachs' optimistic report released in late August, which argued that "valuations remain reasonable despite the surge."
The investment bank significantly adjusted ratings on several optical module leading stocks, with Innolight receiving a double downgrade to underperform, representing the most significant rating change. Morgan Stanley warned that after Innolight achieved 338% year-over-year performance growth in Q2 2025, growth rates may slow significantly in the coming quarters, which could more likely trigger valuation downgrades.
Since April, Innolight has surged 460%, Eoptolink rose 312%, Tianfu Communication gained 269%, and Huagong Tech increased 62%. Morgan Stanley believes that while the outlook for AI infrastructure demand growth remains positive, the current level of market enthusiasm is difficult to sustain. Combining fundamental and valuation analysis, the firm recommends investors maintain discipline and gradually take profits.
**Valuations Reach Upper Historical Range**
Morgan Stanley's cautious stance is primarily based on valuation considerations. The firm's analysis shows that Eoptolink and Tianfu Communication's valuations have exceeded the historical +1 standard deviation level, meaning fundamental positives have been at least partially digested. In comparison, Eoptolink's current valuation is below the +1 standard deviation level.
From a valuation change perspective, since the beginning of 2025, Eoptolink's forward P/E ratio has risen from 14x to 24x, while Innolight's increased from 8x to 20x. Morgan Stanley believes the current market consensus already views Innolight as the world's second-largest manufacturer with the best gross margins, limiting further upside potential.
This contrasts with Goldman Sachs' optimistic expectations from late August. Goldman Sachs focused more on the certainty of demand growth, while Morgan Stanley pays greater attention to the balance between valuation safety margins and growth sustainability.
**"Yi Zhong Tian" Trio Shows Divergent Prospects**
For the optical module industry's "Yi Zhong Tian" trio (Innolight, Eoptolink, Tianfu Communication), Morgan Stanley provided different investment recommendations:
Innolight: Double downgraded to underperform with a target price of 255 yuan. Morgan Stanley believes the current market consensus already views the company as the world's second-largest manufacturer with the best profit margins, limiting upside potential.
Eoptolink: Maintained overweight rating with a target price of 435 yuan. As a pioneer of 1.6T new products, the company is expected to achieve significant growth in 2026, positioning it better than industry peers.
Tianfu Communication: Downgraded to underperform with target price raised to 142 yuan. The company's profit growth potential is already reflected in the current stock price, with valuations exceeding the +1 standard deviation level.
Morgan Stanley also maintained its underperform rating on Huagong Tech, believing the company has weaker fundamentals relative to industry peers and more expensive valuations. Meanwhile, target prices for Yangtze Optical Fibre and ZTE were raised while maintaining respective ratings, as performance fundamentals have not yet reached an inflection point, but stock price gains have already reflected potential positives.
**1.6T Products Become Key Catalyst**
Looking ahead, Morgan Stanley views the rapid volume growth of 1.6T products as a potential catalyst for H2 2025 and 2026. Due to GB300's delay in early 2025, the shipping timeline for 1.6T optical modules was also negatively affected. However, with the restart of high-end GPU deliveries, 1.6T optical module shipments should gradually increase in H2 2025.
According to LightCounting data, 800G began mass production in 2024, while 1.6T will start commercial production in 2025-26. Some optical module companies have completed the validation phase for 1.6T products, with expectations that rapid volume growth in H2 2025 and 2026 will become important revenue and profit drivers.
Morgan Stanley expects that with incremental revenue contributions from 1.6T products, optical module companies should maintain revenue growth in H2 2025 and 2026. Meanwhile, 800G demand will also remain strong, helping to offset pricing and volume pressures on relatively lower-end optical modules.