AI computing power rebounded, optical modules continued to soar, Accelink touched the daily limit, and the investment value of the industrial chain was understood in one article
On March 28, 2024, the direction of AI computing power rebounded strongly, optical modules and optical communications continued to soar, as of 13:12, Tongyu Communication's daily limit, Ruijie Network rose by more than 9%, Accelink Technology, Unisplendour Co., Ltd., Yuanjie Technology, Liante Technology, Borche Technology, Fiberhome Communications, etc. have strengthened. 5G communication ETF (515050) rose more than 4% intraday.
First, the market is soaring optical modules
Since the end of 2022 and the beginning of 2023, ChatGPT has become popular, and the revenue and market value of NVIDIA, the leader of AI computing power chips in the United States, have hit new highs, and the optical module and optical communication concept sectors of the A-share market have soared, and the market has been repeatedly active throughout 2023, and will lead the market rebound again in 2024. Taking the 5G communication ETF (515050) with high "light" content as an example, it rose by 52.07% from mid-to-early October to mid-to-late June 2023 in the ETF2022, and since the bottom of the market stage on February 5 this year, it has rebounded by more than 35% with the re-catalysis of sora and Nvidia hot spots.
(Note: The rise and fall of the trading price of the fund in the secondary market does not represent the net value performance of the fund, and the stocks mentioned above are not recommended; the 5G communication ETF (515050) tracks the CSI 5G communication theme index, and optical modules, optical communications, and AI computing power concept stocks account for nearly 40%)
Image source: wind
2. What is an optical module?
Optical module is the core device for data transmission between communication equipment, and its main role is to carry out photoelectric conversion.
In optical fiber communication, the initial state of the data signal is often an electrical signal, through the optical module, the signal transmitter converts the electrical signal into an optical signal, and then transmits it to the signal receiving end through the optical fiber, and after the optical detector receives the optical signal, it is converted into a processable electrical signal again, and transmitted to a computer, router or switch and other equipment.
We know that light is the fastest medium in the world, if the information is converted into light for transmission, then the transmission speed will be greatly improved, compared with the past cable propagation, optical transmission has greater advantages in terms of transmission distance, transmission rate, and transmission capacity. Therefore, optical modules are widely used in data centers, enterprise networks, telecom operator networks, and other fields. For example, various servers in the data center need optical modules to interconnect, so as to achieve faster and more stable information transmission.
It can be said that where large-capacity and high-speed data transmission is required, optical modules will not be absent. The larger the data transmission, the greater the demand for optical modules.
Image source: Guosheng Securities Economic Research Institute
For example, in the 5G communication network architecture, optical modules play a very important role, and each 5G base station needs to be connected to the corresponding equipment room for data transmission. Among them, the fronthaul mainly corresponds to 25G/50G optical modules, the midhaul mainly corresponds to 50G/100G optical modules, and the backhaul mainly corresponds to 100G/200G/400G optical modules. From 2019 to 2023, an average of 675,400 new 5G base stations will be added every year, and at the same time, under the background of "Eastern Data and Western Computing", digital economy, and network architecture upgrades, the three major operators are gradually increasing their investment in industrial Internet and computing power networks, further pushing up the demand for optical modules and putting forward higher requirements for the speed of optical modules.
Image source: Tianfeng Securities Research Institute
In addition, in recent years, benefiting from the continuous acceleration of mobile Internet, cloud computing, and AI, data centers have gradually become the most important application scenarios of optical modules. With the rapid growth of data scale, the demand for computing power and data storage by individuals and enterprises is gradually migrating to the "cloud", and the investment in data center construction of operators is accelerating, and the demand for infrastructure such as servers, switches, and optical modules is rising. According to market research estimates, from 2023 to 2032, the global hyperscale data center market will grow at an annualized compound growth rate of nearly 28%.
Image source: Tianfeng Securities Research Institute
3. AI: The next stop for optical modules
"From the light of signal to the light of traffic to the 'light' of AI", the title of an optical module analysis article by the communication team of Tianfeng Securities may vividly summarize the next driving force of optical module demand - AI.
In 2023, the AI text chat tool ChatGPT became popular, and then many AI companies released their own AI large models, such as Google launched the PaLM2 model, Meta released LLaMA-13B, Microsoft built New Bing based on ChatGPT; domestic Baidu took the lead in releasing Wenxin Yiyan, recently, the popularity of domestic large model Kimi continued to rise, once rushed to the fifth place in the free version of the App Store. The arms race for AI models has entered a white-hot stage.
Behind the rapid development of AI large models is a huge amount of data and huge computing power, and with the continuous upgrading and iteration of the model, the amount of data and computing power required is also increasing exponentially. According to the "AI and Compute" analysis report released by OpenAI, since 2012, the computing power demand of AI training applications has doubled every 3-4 months, and since 2012, AI computing power has increased by more than 300,000 times.
Huge training tasks require computing power clusters composed of a large number of GPU servers (containing multiple AI chips) to provide computing power, and these servers are inseparable from optical modules for massive data exchange. In other words, the greater the number of GPU chips that provide computing power, the stronger the performance of AI chips, and the greater the demand for supporting optical modules, especially high-performance optical modules. Tianfeng Securities estimates that each single H100 corresponds to the demand for 1.5 800G optical modules and 2.15 400G optical modules, corresponding to the demand for about 20 100G optical chips.
Image source: Tianfeng Securities
With the increase in the demand for high-performance optical module products for AI large models, in addition to the increase in volume, the price increase has also helped the prosperity of the optical module industry. In order to better match with high computing power and improve computing efficiency, it is the general trend for optical module products to upgrade to 400G, 800G and even 1.6T, and high-performance optical module products with higher unit prices will drive the price band upward.
Guosen Securities believes that communication capability is one of the bottlenecks of computing power clusters, and the training of AI large models puts forward higher requirements for network architecture and network protocols, and continues to evolve towards low latency and high speed, increasing the demand elasticity of high-speed optical modules. At the same time, optical interconnection technology is also expected to introduce inter-chip interconnection, and the optical input and copper retreat will continue to deepen. On the demand side, benefiting from the continuous increase in the computing power arms race by global technology giants, the gradual deepening of AI applications, and the continuous increase in the demand for training and inference computing power, AI has become the core driving force for the growth of the Datacom optical module market.
Fourth, the competition pattern of the optical module market
In the past decade, domestic optical modules have developed rapidly, and the global market share has continued to increase. At present, it is one of the few advantageous links in the domestic computing industry chain with global competitiveness, and has the ability to directly enter the North American AI industry chain.
As of 2022, 7 domestic companies have been shortlisted for the global top 10 optical module manufacturers, Zhongji InnoLight and Coherent tied for the first place, and the third to seventh places are Huawei, Accelink, Hisense, Xinyisheng, and Huagong Technology.
Image source: Guosen Securities
Driven by the AI wave, the concentration of the optical module market is expected to increase under the head effect. Looking back on the development history of optical modules, with the changes in the procurement mode and packaging process of cloud manufacturers, the optical module industry has ushered in a reshuffle opportunity, and in the era of intelligence, high-performance optical modules are in short supply as scarce computing power, and the head manufacturers have strong R&D strength and willingness to reinvest, and may have a first-mover advantage in intergenerational upgrades to further consolidate and increase market share. According to market research data, since 2019, the market share of the world's top 3 optical module manufacturers has increased rapidly, and with the continuous growth of AI demand for 800G and above optical modules, the leading manufacturers may enjoy development dividends.
Image source: Guosen Securities
Related ETFs: 5G Communication ETF (515050) [OTC Connect (Class A: 008086; Class C: 008087)]: It is the largest 5G communication ETF in the whole market, with a total weight of nearly 40% in AI computing power, optical modules, optical communications, and concept stocks. [Original abbreviation: 5GETF(515050)]
Image source: Wind, as of February 29, 2023