Potential Upstream Beneficiary of Nvidia’s CPO Push Come 2026

There is a small-cap company that is emerging as a potential beneficiary of an upcoming shift to co-packaged optics over the next two years. Nvidia introduced its first co-packaged optics (CPO) switches with integrated silicon photonics at GTC 2025, addressing the need of providing more bandwidth and faster speeds while reducing energy consumption in exascale GPU clusters.

Nvidia is utilizing TSMC’s COUPE (Compact Universal Photonic Engine) for its Quantum-X and Spectrum-X switches, and this company’s wafer-level optics tech (WLO) is expected to be an integral part of the CPO supply chain for TSMC’s COUPE.

For 2025, this company is expecting little to no revenue from CPO, though it expects the business to ramp quite rapidly come 2026 and beyond, due to the advantages CPO offers in terms of bandwidth and its upstream placement in the supply chain serving a critical need for COUPE.

While this analysis will focus on this stock’s opportunities in wafer-level optics, which has the potential to quickly become a significant driver for revenue growth from the emergence of co-packaged optics, it’s important to note that this segment remains quite small presently while automotive remains the core growth driver for the company.

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Nvidia Unveils New CPO Switches at GTC

The AI industry has been rapidly progressing towards million-plus GPU clusters, with Broadcom outlining late last year that it believes its three hyperscale customers are aiming to each have 1-million GPU clusters by 2027, which will require new scale-up networking architectures and components.

Co-packaged optics (CPOs) are seen as one possible way to break past the cost and power bottlenecks of current pluggable optical technologies and facilitate the development of larger-scale AI clusters. CPOs place optics directly on the switch die which decreases the distance and thus insertion loss, while improving power efficiency due to that shorter distance.

Source: Cisco

Nvidia’s two new switches unveiled at GTC, the Quantum-X Photonics InfiniBand and Spectrum-X Photonics Ethernet, were designed with that million-plus GPU cluster scale goal in mind. Nvidia says that by replacing pluggable optics with silicon photonics on the package, it can “deliver 3.5x more power efficiency, 63x greater signal integrity, 10x better network resiliency at scale and 1.3x faster deployment compared with traditional methods.” In simple terms, the switches are more reliable, more efficient, consume less power, and are quicker to deploy than current networking tech.

Nvidia VP Ian Buck stated at GTC that the CPO switches help reduce power consumption by eliminating the need for external lasers and pluggable transceivers to achieve a significant reduction in power from 39 watts to 9 watts. Buck explained that this “gives you that benefit from going from 39 watts of power down to only 9 watts of power for the same number of ports, and that's huge. It doesn't sound like 39 sounds a lot. But if you get 400,000 GPUs in an AI supercomputer, there's like 24 megawatts of lasers like so that's a lot of laser light that could be optimized and made more efficient.”

24 MW may not sound like much, but given that the GB300’s are expected to draw up to 140 kW per rack, that’s the equivalent of nearly 172 GB300 racks (or the equivalent of approx. 12,400 individual GPUs) in power savings from the shift to CPO. Thus, by shrinking the bill of materials by eliminating pluggable transceivers while simultaneously providing a much more power-efficient solution, Nvidia can further reduce TCO for its customers.

Nvidia Expects CPO Switch Availability as Soon as 2H 2025

Similar to its GPU roadmap, Nvidia is moving quickly when it comes to its CPO switches, expecting availability for its Quantum-X Photonics InfiniBand switches as soon as the second half of this year, while its Spectrum-X Photonics Ethernet switches are expected to be released in 2026.

TSMC’s COUPE Paves Way for CPO Adoption

Nvidia’s new switches rely on TSMC’s silicon photonics platform called COUPE (compact universal photonic engine).

TSMC first published research on this new platform in 2021, as a team of researchers discussed a primary challenge of mass adoption of silicon photonics, which was at the time the lack of an integration platform that could meet a range of power, performance and cost needs. TSMC’s researchers proposed COUPE, which they said had the ability to meet “the most demanding system requirements and pave the way for [silicon photonics]-based wafer level system integration (WLSI) for high performance computing applications.”

COUPE combines a photonic integrated circuit (PIC) with a 65nm electronic integrated circuit (EIC) via its SoIC-X advanced packaging tech. TSMC says that utilizing SoIC-X “enables the lowest impedance at the die-to-die interface and therefore the highest energy efficiency.” COUPE is also easily integrated with merchant ASICs and GPUs to form a co-packaged structure.

TSMC laid out a tentative timeline at the 2024 North American Technology Symposium in April 2024. At the symposium, TSMC laid forth a plan to enable COUPE in pluggable optics in 2025, and COUPE on substrate in a CoWoS-based CPO in 2026, which it said would offer 2x reduction in power and 10x reduction in latency. TSMC mentioned that it was exploring COUPE on CoWoS interposers for further power reduction.

Recently, TSMC has been rather tight-lipped about COUPE and co-packaged optics — in Q4’s earnings call, CEO C.C. Wei was questioned about CPO and how it would facilitate this shift in the supply chain. Wei answered that for “big volume, I don’t think it will be in this year, or probably we have to wait for one or one and a half year to see that contribution or the volume production. The initial results are quite good, no doubt about it.”

SoIC capacity is expected to rise at a rapid rate, though there have not been any major updates recently. At the beginning of 2024, TSMC’s SoIC capacity was estimated to reach 5,000 to 6,000 wafers/month by the end of the year, a 150% to 200% YoY increase. 2025’s capacity at the time was expected to reach 10,000 wafers/month, nearly doubling YoY. A recent update from TrendForce reaffirmed the 10,000/month capacity for 2025 and outlined the possibility of another doubling of capacity in 2026.

It had been reported in May 2024 that TSMC was aiming to expand its SoIC capacity at a 100% CAGR from 2023 through 2026, correlating to an “eight-fold” increase in capacity from 2023’s levels by 2026.

FOCI’s Role in CPO with TSMC

While TSMC is taking a more back-seat view to CPO’s timelines, suppliers are expecting a more accelerated ramp, with FOCI and Browave both seeing initial shipments in 2025 and a rapid ramp through 2026. FOCI is viewed as one of TSMC’s closest collaborators on CPO.

In its 2023 annual report, FOCI stated that “CPO technology has just entered the market, and the production cost is still high,” but with the “explosion of high-speed transmission demand, it is expected that CPO technology will be a necessary technology that cannot be ignored and will enter the market in large quantities after 2025.”

According to DigiTimes, FOCI anticipates that CPO fiber array products will see some smaller scale shipments in 2025, leveraging its ReLFACon (Reflowable Lensed Fiber Array Connector) products for optical switches and HPC/AI use cases. Mass production of CPO components is expected in 2026.

FOCI is rumored to be the sole supplier of external fiber array units (FAUs) to TSMC’s first and second-gen COUPE via its ReLFACon product. FAUs are a critical part of CPO tech — the FAUs ensure smooth and efficient coupling of optical fibers to the silicon photonics engines, which enables high data throughput and reduces latency. In COUPE, the FAUs are used to align optical fibers on the PIC; COUPE 2.0 introduces a broad-band coupler that integrates with the FAUs to minimize insertion loss and extend alignment tolerance, which can lower manufacturing costs at the alignment stage.

FOCI is not the only supplier preparing for strong growth come 2026 — Browave (which also holds a 4.6% stake in FOCI) is said to be fast-tracking its CPO development, as one of the named partners for Nvidia’s switches at GTC. Browave “expects to complete CPO validation by late 2025,” and is preparing for a “breakout” 2026, per DigiTimes.

Explosive Growth Forecasted for CPO Market

The CPO market is relatively new in that 2025 is expected to be the first year when growth surfaces before accelerating through 2026. Morgan Stanley estimated the CPO market size at just $8 million in 2023, projecting a 172% CAGR through 2030 in its base case scenario to reach $9.3 billion.

This base case forecast has a few key assumptions: 1) Nvidia is the first to adopt CPO in its Rubin rack systems in 2026, with Rubin’s shipment volume reaching 200,000 units in 2026 and 700,000 in 2027; 2) other vendors including Cisco, Broadcom and Marvell begin shipments in 2027.

Morgan Stanley also outlined a bull case scenario, projecting growth at a 210% CAGR, resulting in a significantly larger end market of $23 billion by 2030. This relies on much more optimistic assumptions: 1) Rubin shipments of 500,000 in 2026 and 1.75 million in 2027; 2) broader adoption of CPO by more chip manufacturers; 3) CPO yield rates greatly improved.

However, Morgan Stanley’s bear case scenario sees the CPO market only $1.3 billion by 2030, on the assumptions that CPO yield issues cause shipment delays and thus a lower customer willingness to adopt the technology.

CPO One of 3 Growth Opportunities Ahead for Himax

Himax is expected to be a critical player in this CPO push due to its partnership with FOCI, and sees CPO and WLO as one of three different growth opportunities ahead (with the other two being automotive OLED and ultralow power WiseEye AI sensing chips). For Himax, WLO presents a rather large opportunity over the next six to twelve quarters as Nvidia progresses with CPO switches to enable the scaling of data centers to millions of GPUs.

In June 2024, Himax deepened its strategic partnership with FOCI and acquired a 5.3% equity stake in the firm for $16 million. Himax explained that the partnership leverages and combines WFO’s expertise with FOCI’s advanced ReLFACon solution to develop linear pluggable optics (LPO) and co-packaged optics solutions for AI and HPC chips that “demand enhanced bandwidth, improved data rate, minimized signal loss, reduced latency, and lower energy consumption.”

Himax says that its WLO technology plays a crucial role in CPO by “providing essential optical coupling capability” as a core part of the CPO solution. Himax is said to be a sole supplier of micro-lens array units to FOCI’s FAUs for first and second-gen COUPE.

Himax Outlines CPO’s Value Proposition, Ramp Profile

Shortly after this investment, in August’s Q2 earnings call, management noted that they expect WLO to play an “even more decisive role in the next-generation optical technology landscape,” due to its versatility, precision and “small form factor characteristics that are not feasible with alternative technologies.” They stated that they believe LPO and CPO tech can “generate new, long-lasting revenue streams for Himax.”

Management added that they are working closely with FOCI to align with multi-year roadmaps of foundry partners and AI chip customers with an effort to meet their near-term production targets. It is assumed that this comment is referring to TSMC’s COUPE and Nvidia’s CPO switches.

Q2’s analyst Q&A highlighted that this is not simply an R&D project, but rather one that is progressing quickly towards mass production:

Q: Donnie Teng, Nomura

My second question is regarding to the CPO. So would you maybe elaborate more on, you know, what’s the timeline of the CPO product. When should we expect to see some, you know, small volume contribution? And how confident you are to ramp up this business in the mid to long term?

A: Jordan Wu, Himax CEO

“First on precise timeline, I’m bound by NDA of my partner and customer, so I’m afraid I cannot give you very, very specific date or timetable. But I can tell you, what we are working on right now, the design is targeting for mass production. It is certainly not a R&D concept. …. Actually we’re way past the stage … and we are now pushing towards mass production ASAP. That’s what I can tell you. In fact, we expect to see some small but very early result hopefully by the end of this year but that’s minimal. But the next year, you know, if everything goes as planned, there will be steady ramping. And the confidence level mid to long term, I would say very confident.

… So I would say, you know, everybody in the ecosystem is very keen to making sure that this happens ASAP. … And we have a roadmap together with partners, our customers, to really pretty dramatically expand the transmission bandwidth very substantially. I’m talking about by multiple times over the next few years. And you know, some of these projects are already in experimental stage in the earlier experimental stage or more mature experimental stage.”

Himax confirmed in its 2024 annual report that small-scale production of its first-gen CPO solution was already underway by the end of 2024.

Himax Provides Major Update in Q4, Lays Out CPO Revenue Opportunity

Himax provided a major update in Q4 regarding CPO, as it continues to progress through small-scale production of its solution for LPOs and developing its platform for CPO architectures with FOCI.

Management stated that the long-term prospect of CPO remains unchanged despite the market’s AI jitters from DeepSeek, and this was “evident by the significant increase in [the] customer’s recent trial production volume forecast, indicating an accelerated timeline for CPO technology to enter mass production.” They also expect sample volume increases over the next few quarters.

Most importantly, Himax’s management outlined what CPO’s revenue contribution could look like in the future, with CEO Jordan Wu emphasizing that Himax is now “more optimistic than ever” about the outlook for WLO and CPO products, which they believe are “poised to generate significant growth opportunities and become a major revenue and profit contributor in the years ahead.”

Here’s what Wu said about 2025, 2026 and the revenue opportunity in dollar terms:

“2025 will be a year for engineering validation with only sample shipments for us. So while the sample shipment will accelerate quarter by quarter, the revenue contribution will be rather limited, if you compare that with our total revenue. The fourth quarter, which presumably will be the peak of this year, the revenue is set to be in millions of dollars based on current forecast. But again, it's still quite small compared to our total size and things can still change. It's still early.sample shipment will accelerate quarter by quarter, the revenue contribution will be rather limited, if you compare that with our total revenue. The fourth quarter, which presumably will be the peak of this year, the revenue is set to be in millions of dollars based on current forecast. But again, it's still quite small compared to our total size and things can still change. It's still early.

Now, in all likelihood, mass production will commence in 2026, but we don't know how, and certainly we won't comment on exactly when, in 2026. It's probably still more than a year from now. There are still many unknowns, like how many customers, how many projects, or their ramping curve, etc. And therefore, while 2026 is likely to be the first year of mass production, it is still early and it's still difficult to give a revenue indication for the year at this point.in all likelihood, mass production will commence in 2026, but we don't know how, and certainly we won't comment on exactly when, in 2026. It's probably still more than a year from now. There are still many unknowns, like how many customers, how many projects, or their ramping curve, etc. And therefore, while 2026 is likely to be the first year of mass production, it is still early and it's still difficult to give a revenue indication for the year at this point.

Now, if we look further ahead and ignore the exact timing and ramping curve, etc, for the time being, and just try to kind of paint a picture for, I would call it annualized potential revenue for Himax,… when the CPO business reaches an ‘early stage’ of mass production, right … when the industry is perhaps still testing the water, with maybe only premium models equipped with CPO.

In making the assessment, we have considered leading AI customer total advanced GPU shipment outlook … and the leading foundry's total CoWoS capacity plan, which is very much public information. And we have assumed a very low percentage of CPO attach rate for both, right. … So with such conservative assumptions, I can say that our annualized CPO revenue could still reach hundreds of millions of dollars when we get there. Again, this is early stage, and this is the best I can do in terms of providing a revenue indication.” I can say that our annualized CPO revenue could still reach hundreds of millions of dollars when we get there. Again, this is early stage, and this is the best I can do in terms of providing a revenue indication.”

Wu believes that the determining factor is not a question of whether CPO adoption will occur, but rather a question of how fast CPO will penetrate the industry due to the benefits it offers to power consumption, bandwidth, and cost. Wu added that he also believes the ultimate demand for the new tech is likely to be far above what Himax can predict at this stage.

Putting Hundreds of Millions of Revenue in Perspective

While hundreds of millions of dollars is but a mere splash in the bucket for a company like Nvidia or TSMC when it comes to AI-driven revenue, that opportunity is remarkably large for a company like Himax.

Himax reported just $907 million in revenue in 2024, or just over a (4%) YoY decline due to global demand weakness and conservative purchasing trends from customers due to market uncertainty. Gross margin improved more than 2.5 points YoY to 30.5%, its first annual expansion since 2021, aided by strong 20% YoY growth in the automotive segment (50% of revenue in Q4) which Himax says enjoys a higher gross margin than its corporate average.

Himax’s revenue performance has been challenged since 2021, where the pandemic-driven operating environment led to demand outpacing supply in core display driver end markets, leading to 110% YoY automotive revenue growth, 77% YoY tablet IC growth, and 85% YoY smartphone growth. Himax generated $1.55 billion in revenue in 2021, up more than 74% YoY while gross margin nearly doubled to 48.4% due to very favorable price and product mix. Revenue has declined YoY each year since then.

For an emerging new opportunity that has yet to generate meaningful revenue, WLO holds the potential to grow into the size of 25% to 50% of Himax’s current annual revenue, or multiple times the size of its non-driver business, which has reported revenue between $140 million to $185 million the past four years.

The CPO-driven opportunity holds remarkable potential to dramatically increase Himax’s topline and growth and put it on a path to quickly reach fresh records for revenue. However, this opportunity also extends down the line as it may provide a substantial boost to Himax’s earnings power.

Himax is currently operating at around a 30% gross margin and high-single digit operating margin profile. However, this operating margin is driven entirely by Himax’s driver segments, as its non-driver segment had generated widening operating losses from 2021 through 2023 before slightly rebounding in 2024.

Operating losses for Himax’s non-driver segment widened from ($17.7 million), or an (11%) margin, in 2022 to ($32.1 million), or a (23%) margin, in 2023. However, losses rebounded slightly to ($24.5 million) in 2024, or a (16%) margin. This weakness amplified the rapidly shrinking operating income from drivers, which faced pricing pressures in 2022 and 2023, and weighed down on the segment’s rebound to $93 million in operating income in 2024.

Himax explained that low sales volumes in non-drivers “led to insufficient revenue to fully cover expenses” over the past few years, but as volume production ramps, such as for products including WLO and WiseEye, Himax expects to generate positive operating income as non-driver products have “higher gross margins as well as higher growth potential” versus drivers.

Given some of the uncertainties about timing of CPO’s ramp, volumes at mass production, realized selling prices and other factors, Himax has provided no insight into what the margin profile for WLO could look like. Assuming the CPO business ramps as expected and matures into a 40% gross margin, 15% operating margin business at an $500 million dollar scale, it could generate $200 million in gross profit and $75 million in operating income by itself. This alone could represent a ~$0.40 positive impact to EPS.

If CPO matures into a much higher-margin business due to Himax’s and FOCI’s positioning in the supply playing a core role to help foundry partners meet high demand, say at 60% gross and 30% operating margins (approx. in line with 2021’s corporate operating margin), it could generate $300 million in gross profit and $150 million in operating income, or up to $1 in positive EPS impact.

At the moment, there is little analyst coverage and limited visibility into Himax’s growth prospects. Current analyst estimates point to a slight YoY decline in EPS in 2025 to $0.44, with revenue rising 8% to $981 million as Himax works its way out of a more challenging macro backdrop. For 2026, EPS is expected to double to $0.88 with revenue growth of 20% to $1.18 billion, though this could be impacted by the timing and pace of CPO’s ramp.

Himax does have other growth opportunities outside of CPO, with management anticipating strong growth in its WiseEye business in 2025 and continuing momentum in automotive TDDIs, timing controllers and growth in auto OLED.

Quick Note on Technicals

In 2019, Himax appears to have put in a major low.  That being said, investors should still expect large swings and the potential for bouts of volatility as this larger uptrend pattern plays out. 

The current drop that we are in is hitting strong support just under $8. If this level can hold, we should see one more push into the $17 region in the coming months, which would complete a large 1st wave.  If this does happen, we would then need a 2nd wave pullback to follow.  This would likely take you back into the $10 – $7 range, before commencing with the larger uptrend pattern. If any bout of volatility takes us under $6.40, then we should expect a drop into the $4 – $2 region before finding a meaningful low. 

While the larger pattern suggests much higher prices for HIMX, based on the overlapping nature of this pattern, investors should expect periods of heightened volatility along the way. The $6.40 price point is a major line in the sand. If this holds and we see a push into the $17 region, investors should also be aware for the potential of a notable pullback before taking off. 

Major Risk: China Sourcing:

Himax operates via a fabless business model utilizing third-party foundries and OSAT capabilities, and primarily sells products via direct sales teams in core regions Taiwan, China, South Korea and Japan. However, Himax generates more than three-fourths of its revenue from China, which could place it in the cross-hairs of increased geo-political tensions.

Himax notes that it relies on TSMC, UMC, GlobalFoundries Singapore, Macronix, PSMC, Nexchip and SK Hynix System IC for wafer fabrication, while its WLO production is done in-house in its two facilities in Taiwan.

China’s revenue share declined slightly from 76.2% in 2023 to 73.4% in 2024, with a majority of this revenue (85%) in the Drivers business. China accounted for nearly 77% of Himax’s Drivers business in 2024, and 63% of its Non-Drivers business. While Himax may not be exposed directly to US-based tariffs due to its concentration in Asia for supply chain and manufacturing, it warned that it expects to “continue to be subject to economic and political events and other developments that affect our customers in Asia,” and if tariffs dent consumer electronics demand either in Asia or globally, Himax could face revenue headwinds as a result.

The I/O Fund owns a stock that is rumored to be a future CPO supplier to Nvidia (and is a current Nvidia supplier) while being vertically integrated on sourcing. This company’s CEO pointed out this is an area incremental strength and an advantage as they manufacture most of their parts internally (which is quite rare) and can quickly capitalize on a rapid ramp in demand. The company stated that they also will source when the demand requires it, yet the vertical integration on the manufacturing side with primary production in the US, and some in Europe, help avoid heightened tariff risks from China.

Conclusion

CPO beckons a massive opportunity ahead for Himax due to its positioning upstream in the supply chain for TSMC. Management outlined that the emerging technology could represent hundreds of millions of dollars in annualized revenue assuming a low attach rate as the tech ramps through 2026 and beyond.

While CPO promises hundreds of millions of potential revenue and possibly a large positive impact to EPS as it matures, Himax’s driver business remains in the driver’s seat for 2025 and 2026 until CPO growth arises, and the segment is still plagued by margin weakness. The driver business is far from 2021’s peak for revenues and margins, and thus Himax’s EPS, and it may struggle to return to 2021’s levels due to the supply chain circumstances and resulting pricing advantages it benefited from at the time.

Despite that, Himax appears relatively priced ahead of a potential revenue acceleration and development of a multi-million dollar business line. Himax is currently trading at 18x forward earnings, with EPS estimated to double in 2026, and 1.4x forward sales, with prior peaks around 3x. Gross margins are showing strength due to strong automotive sales and strict cost management, while operating income is beginning to recover from a prolonged contraction from headwinds in the driver segment.

Small caps can have quick and volatile moves, and Himax is no exception. Shares surged 45% in one day in December when it was first named as a potential AI supplier to TSMC, and then rose nearly 100% in seven days in January before plunging nearly -28% during DeepSeek’s market rout and is down nearly 50% from the January high.

The I/O Fund owns a different NVDA and possible future CPO supplier, sharing this research with our Pro and Advanced subscribers, while discussing potential setups and trading plans in our weekly webinars with Portfolio Manager Knox Ridley. Take advantage of a limited-time offer for $75 off Pro or $100 off Advanced here.

Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.

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