Indium Phosphide Shortage Looms as AI Data Centers Scale

A New Bottleneck in AI Infrastructure

The next constraint in artificial intelligence infrastructure may not be chips or memory, but a lesser-known semiconductor material that keeps data flowing between processors. Speaking at the RAISE Summit, Lumentum CEO Michael Hurlston identified indium phosphide (InP) as an emerging supply crisis that could exceed the severity of current memory shortages.

Indium phosphide is a compound semiconductor material used to produce lasers in AI data center transceivers, optical amplifiers, and co-packaged optics engines that sit alongside GPUs. According to Hurlston, the supply-demand imbalance for InP now exceeds 30%, with key components "effectively sold out for the foreseeable future."

Why it matters

As hyperscalers race to build AI compute capacity, optical connectivity infrastructure has become mission-critical. Unlike previous telecom deployments that required hundreds of lasers, AI data centers now demand hundreds of millions of units. This thousand-fold increase in scale is straining production capacity for InP, a material that cannot be manufactured using standard silicon processes. The shortage could slow data center construction and drive up costs across the AI supply chain, potentially affecting deployment timelines for major cloud providers and enterprise AI initiatives.

Scale Shift Strains Production

The magnitude of demand represents a fundamental shift from previous optical networking cycles. Hurlston explained that traditional telecom customers deployed lasers in the hundreds, while current AI infrastructure requires hundreds of millions of units. Ramping production from thousands of wafers to millions in a non-silicon material presents significant manufacturing challenges.

Lumentum operates five indium phosphide fabrication facilities that the company is working to scale. Hurlston noted that pump laser constraints have become "probably the biggest issue and were somewhat unanticipated."

Financial Performance Reflects Demand

Lumentum's Q3 fiscal year 2026 results underscore the intensity of demand. The company reported revenue of $808.4 million, up 90.1% year over year, with non-GAAP operating margin expanding 700 basis points sequentially to reach 32.2%. During the earnings call, Hurlston stated that "the supply-demand imbalance is probably even higher than we reported in our last call, somewhere greater than 30%."

Hurlston warned that even the combined capacity of the two dominant InP producers—Lumentum and Coherent—may be insufficient to meet demand from NVIDIA and other data center equipment makers working to address power and thermal challenges in AI infrastructure. NVIDIA has invested in both companies as it seeks to secure optical component supply.

Market Reaction

Despite sold-out inventory and strong financial performance, optical component stocks have experienced significant volatility. Lumentum shares declined more than 20% following the earnings report, with competitor Coherent experiencing similar selloffs.

These details were first reported by Yahoo Finance based on Hurlston's remarks at the RAISE Summit and the company's Q3 fiscal 2026 earnings call.