By Lisa Thompson

NASDAQ:POET

READ THE FULL POET RESEARCH REPORT

Despite not starting that way, POET (NASDAQ:POET) has become a pure play in AI hardware as almost every single one of its customers is selling to data centers for AI or is manufacturing AI chips and hardware. Based on current customers we expect the majority of its revenues in 2025 to come from three customers: Foxconn, Luxshare, and Celestial AI, and all three of them are chasing the AI market. While the company may not announce contracts or purchase orders due to customers requesting secrecy, they all may contribute more than 10% of reported revenues forcing the company to reveal their names in filings. Luxshare is furthest ahead with one 800G product already designed and five more products in the works. Foxconn started on a design recently and should receive final samples six months from now, making it late 2024 or early 2025 with product shipments in the second half of 2025. POET has completed its design for Celestial AI. We expect POET to ship a few thousand of its light source devices for field testing in 2025. A fourth customer, Adtran has already announced its pluggable products and should start buying from POET in volume in 2025. While not directed at AI per se, Adtran’s optical modules are unique and could only have been developed and produced using POET’s small optical engines. This presages POET’s likely optical module strategy, which would be to produce unique modules for niche markets avoiding direct competition with its optical engine customers.

Looking at these four customers and taking into account lead times for sampling and qualification, POET expects production revenue to begin in Q2 2025, most should be at the end of 2025 and the ramp should be steep. According to LightCounting, the optical transceiver market for 800G and 1.6T is growing 33% a year from $2.5 billion this year to $10.5 billion by 2029. Due to its advanced technology and limited competition in the integrated device space, POET hopes to capture a significant share of those transceivers. For example, POET believes that the current suppliers to Nvidia for 800G include only InnoLight, E-OptoLink, and possibly Coherent. They use conventional, less fully integrated technology platforms that require active alignments, use more power, and are less efficient. POET expects that its customers will be able to take market share from those three suppliers over time.

The Market is Not Recognizing The Importance of the Foxconn Deal

POET’s biggest and most recent news is its deal with Foxconn Interconnect Technology (FIT), a subsidiary of Foxconn. FIT plans to be a big player in data center AI and announced a collaboration with MediaTek on system integration for AI networks. The Taiwanese company is designing products with components sourced completely outside China and POET fits that need. The market for 800G single-mode transceivers is over 10 million units a year, and Foxconn hopes to take meaningful market share. POET has been talking to FIT for the past six months and those talks finally resulted in a deal after OFC. FIT has agreed to use POET’s optical engines for its own 800G and 1.6T pluggable optical transceiver modules as it has an opportunity to sell them to a large buyer who is a current customer. As a result of this opportunity, it has accelerated plans to bring products to market. FIT wants engines as soon as possible, and POET intends to deliver samples for testing in the next few months for both transmit and receive engines. 800G is rapidly taking off and POET’s competitors are few and some have not even demonstrated a path to 1.6T speeds, with POET being ahead of the major transceiver suppliers with its 200G per lane transmit chips. POET’s design makes it easy and quick to move seamlessly to 1.6T and allows customers to design their transceivers with best-of-breed components to maximize speeds and low power consumption.

Work on AI-Targeted Products Accelerates as the Market Suddenly Wants Solutions Yesterday

An impetus for the adoption of POET’s technology has been the unexpectedly rapid uptake of AI. While many companies are pursuing AI activities, they will find out that data centers will struggle to keep up with the speeds needed for AI. POET’s elegant and disruptive solution will allow data centers to move easily to 800G and 1.6T speeds. Legacy technology struggles at those speeds and will cost more and consume much more power. Power consumption will be a huge problem for AI as there is already a shortage of base load energy to fuel current usage, let alone the huge amounts of power needed in the near future.

It has taken POET some extra effort to disrupt an industry and introduce a novel technology. It also took longer than expected. POET has had to go to extremes to get customers to buy in and its strategy is finally bearing fruit. After inventing a unique optical interposer, it also needed to develop an optical engine-- but that wasn’t enough. It was too hard for customers to see how it would work in a transceiver and how much effort it would take to produce one, so POET’s idea was to make one, and even try to sell it. This strategy has paid off. In March at the Optical Fiber Conference (OFC) POET indeed did introduce and demonstrate an optical transceiver. There it introduced “Wavelight” its own 800G and 1.6T pluggable optical transceiver modules. Customers could finally see a transceiver designed and operational and see its capabilities and as a result, customers are starting to sign up.

At OFC, POET announced four new products:

1. An 800G transmit optical engine chiplet (200G/lane) that is a fundamental building block for 1.6T and 3.2T pluggable transceivers

2. 8-channel packaged light sources for C-Band and O-Band wavelengths for chip-to-chip data communications for AI systems and co-packaged optics for the data center market.

Other News During the Quarter

On January 3, 2024, POET announced a design win with Shaoxing ZKTel Equipment Co., a supplier to Tier 1 companies in China’s datacom and mobile networking industries. POET and ZKTel have been collaborating to develop a 100G CWDM4 optical transceiver that will go into production in 2024. POET and SPX also have a roadmap with ZKTel beyond the initial 100G CWDM optical engine sales.

During the March quarter, POET also announced it is currently working with MultiLane on POET-branded high-speed pluggable optical transceivers. These new second-generation products will be designed from scratch and incorporate best-of-breed components to achieve the best possible functionality with the lowest possible power consumption. The collaboration with MultiLane will significantly shorten the design cycle time to bring POET’s technology to customers. Power is a huge concern for data centers and baseload power is already inadequate even without the 80% increase projected to be needed to support the plans for AI and EV usage in the next five years. Utilities’ current plans are for a 5% increase over that period.

The stock currently trades at a fully diluted enterprise value of approximately $115 million. According to Yole Group, the optical transceiver market is rising at a CAGR of 15% from $10.4 billion in 2021 to about $24.7 billion in 2027. POET’s product is a component of an optical transceiver and the market is about a third of the transceiver market. If POET can secure even a small portion of that market with its unique offering, its valuation should far exceed its current price. We believe the stock could be worth $7.60 per share based on 2026 revenues at 10.3xs EV to Sales, discounted at 30% back to present value.

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