Overview
Morgan Stanley's research argues that the next phase of AI infrastructure investment will emphasize optical connectivity rather than traditional copper-based interconnects. The brokerage contends that hyperscaler demand for high-bandwidth links is outpacing what copper systems can deliver, creating an opportunity for firms specializing in optical materials, photonics platforms, packaging equipment and laser toolsets.
Market outlook
The report projects approximately a 40% CAGR for Europe’s addressable optical market through 2028, suggesting a multi-year growth cycle that market participants may not yet have fully incorporated into valuations. That growth is expected to be driven by increasing deployment of pluggable transceivers, near-package optics and the longer-term shift toward co-packaged optics.
Company-by-company view
Nokia is highlighted as the top pick. Morgan Stanley views Nokia’s management guidance for its Optical and IP division - 10-12% revenue growth - as conservative. The brokerage models 13% growth for the company overall, with optical revenue expanding at north of 20% on strong hyperscaler demand. Existing agreements with Microsoft and NVIDIA are noted, and Morgan Stanley says the emergence of additional partnerships could act as further upside. The firm assigns an "overweight" rating and a €8.50 price target, which implies about a 16% upside from current levels cited in the report.
Soitec receives a fresh "overweight" rating with a €70 price target, representing roughly 28% upside. The investment case rests on the company’s near-monopoly in silicon-on-insulator wafers, which serve as the foundational substrate for photonic integrated circuits. As production scales from pluggable modules to co-packaged optics, Morgan Stanley expects not only higher volumes but a favorable mix shift that should widen gross margins - an effect the brokerage believes is underappreciated in current share prices.
STMicroelectronics is upgraded to "overweight" with a €36 target and about 25% implied upside. The report forecasts that ST's PIC100 silicon photonics platform will drive combined PIC and electronic IC revenue growth at a 115% CAGR between fiscal years 2026 and 2028, supported by ramps in pluggable transceivers and near-package optics. Morgan Stanley points to endorsement from AWS and ST’s 300mm production capability as competitive advantages positioning the company as a foundry choice for hyperscaler optical demand.
Besi remains "overweight," and Morgan Stanley raises its price target to €200, leaving an estimated 8% upside. The brokerage emphasizes Besi’s role in packaging rather than raw materials: as the industry moves from active to passive fiber alignment and chip-stacking grows more complex, Besi’s bonding and assembly equipment are increasingly central. The firm notes that as optical engines migrate toward co-packaged architectures, more precision bonding steps per module will be required, placing Besi’s equipment at multiple stages of the assembly flow.
Aixtron is treated more cautiously. Morgan Stanley keeps an "equal-weight" rating and a €35 target, implying a modest 4% downside. The brokerage acknowledges real demand for Aixtron's indium phosphide MOCVD tools, driven by laser capacity buildouts and prompting near-term upward revisions to estimates. However, the firm expresses concern about the durability of demand beyond 2027 because large capacity additions already underway could cloud the longer-term outlook, making the risk/reward less attractive than for the other names covered.
Implications
The note frames optics as a central component of AI infrastructure scaling, suggesting differentiated winners across materials, platform IP, packaging equipment and laser tool suppliers. European companies with specialized assets or scale in these areas could see earnings leverage as optical content per server increases.
Conclusion
Morgan Stanley's analysis prioritizes firms with structural advantages in silicon photonics substrates, photonics platforms, advanced packaging capabilities and laser toolsets. The brokerage’s ratings and targets reflect a view that market expectations have room to move higher for several names, while cautioning that tooling capacity dynamics could temper returns for select suppliers beyond the near term.