A New AI Shortage Is Coming. One CEO Just Predicted it Will Be “Bigger Than Memory.”

With AI capex dominating market sentiment, tech leaders are tempting the bulls. Speaking at the RAISE Summit, Lumentum CEO Michael Hurlston warned that the next AI infrastructure bottleneck is indium phosphide (InP), a niche semiconductor material. The shortage, he said, will be worse than what the memory industry faces.

“Between the two of us, I don’t think we can service the demand that NVIDIA and others are now putting on us to solve this resistance problem in the data center. And so, the shortage of indium phosphide, I think, will become even more acute than what we see from the memory guys,” Hurlston said.

Why InP, and Why Now

While chip stocks dominate the headlines, the lesser-known story is what keeps data moving between them. InP is a compound semiconductor that emits light. “it’s basically something that can emit light. It’s a property, a material that can emit light, and we have five indium phosphide fabs that we’re trying to ramp to scale,” the Lumentum chief further explained. Just about every laser inside an AI datacenter transceiver, every pump laser feeding an optical amplifier, and every co-packaged optics (CPO) engine next to a GPU relies on it.

To keep traders guessing, scale change differs from prior optical cycles. “The numbers of lasers that those kind of customers (telecom) would deploy are in the hundreds, right? Now we’re talking about hundreds of millions,” Hurlston said. Ramping from thousands of wafers to millions of wafers in a non-silicon material is, in his words, “no small feat.”

The Numbers Back Him Up

Lumentum (NASDAQ:LITE | LITE Price Prediction) posted Q3 FY2026 revenue of $808.4 million, up 90.1% year over year, with non-GAAP operating margin expanding 700 basis points sequentially to 32.2%. On the earnings call, Hurlston quantified the gap: “The supply-demand imbalance is probably even higher than we reported in our last call, somewhere greater than 30%.” Pump laser constraints are now “probably the biggest issue and were somewhat unanticipated” and key components are “effectively sold out for the foreseeable future.”

Q4 guidance calls for net revenue in the range of $960 million to $1.01 billion alongside an operating margin of 35% to 36%. Pricing power continues to drive performance.

Who Else Sits in the Path

Hurlston highlighted that NVIDIA (NASDAQ:NVDA) invested in Lumentum and in “one of our largest competitors, who also has incredible indium phosphide manufacturing capability.” That competitor is Coherent (NYSE:COHR), which received a $2 billion R&D investment from NVIDIA. Coherent is on track to double internal InP output by year-end 2026 and more than double again by 2027. Datacenter and Communications now accounts for 75% of revenue, up from 41% a year ago.

AXT (NASDAQ:AXTI) is the substrate play. CEO Morris Young closed a $632.5 million capital raise to fund InP capacity at Tongmei and warned that “capacity will become a critical enabler.” Applied Optoelectronics (NASDAQ:AAOI) is the transceiver name, with Q1 datacenter revenue of $81.4 million, more than double year over year.

While the cohort has been rallying YTD, all four stocks sold off sharply in the last month. LITE is down 22.3%, COHR down 37.6%, AXTI down 39.9%, and AAOI down 35.7%. If Hurlston’s shortage call is right, fundamentals are moving opposite the tape.

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