AI boom shines spotlight on photonics: Why are investors betting big on it? | Personal Finance

The artificial intelligence (AI) boom is creating winners far beyond chipmakers such as Nvidia. One of the biggest beneficiaries is photonics—the technology behind lasers, fibre-optic communication and optical chips—which is increasingly emerging as a key investment theme for the next decade.

 

From backing companies developing optical networking technologies to the launch of Europe’s first dedicated photonics exchange-traded fund (ETF), investor interest in the sector is gathering pace. But while Europe remains a global leader in photonics research, investors warn that inadequate funding could allow China to cement its dominance in manufacturing.

 

What is photonics?

 

Simply put, photonics is the science and technology of generating, controlling and detecting light (photons).

 
 

Just as electronics use electrons to process and transmit information, photonics uses light.

 

The technology powers products that many people use every day, including:

 

• 
  fibre-optic internet
• 
  laser manufacturing
• 
  medical imaging equipment
• 
  LiDAR sensors used in autonomous vehicles
• 
  smartphone facial recognition systems
• 
  high-speed data centres
• 
  satellite communications
• 
  defence and aerospace systems

 

Increasingly, photonics is also being used to connect AI chips inside data centres because light can carry significantly more data while consuming less power than conventional electrical connections.

 

Why is AI driving demand?

 

As AI models become larger, they require thousands of chips to communicate with one another almost instantly.

 

Traditional copper wiring is becoming a bottleneck.

 

Instead, technology companies are increasingly adopting optical interconnects, which transmit information using lasers and optical fibres.

 

That explains why Nvidia has invested billions of dollars in companies such as Coherent and Lumentum, both of which develop photonics technologies used in AI networking.

 

According to market research firm MarketsandMarkets, demand is also being driven by sectors including:

 

• 
  5G telecom
• 
  quantum computing
• 
  defence
• 
  industrial automation
• 
  healthcare

 

Investors are taking notice

 

The investment opportunity is expanding beyond venture capital.

 

Earlier this month, Defiance launched Europe’s first dedicated photonics ETF, listed on the London Stock Exchange and Borsa Italiana, giving public market investors exposure to companies operating across the photonics value chain.

 

For investors, the sector represents a way to participate in the AI infrastructure story beyond semiconductor companies.

 

Europe fears falling behind

 

Despite producing world-class research, Europe risks losing ground commercially.

 

According to Daiva Rakauskait?-, managing partner at a VC fund Aneli Capital, this is a strong catalyst for Europe’s photonics leaders to build on the region’s scientific and engineering strengths and translate them into industrial scale faster. This matters because, over the last two decades, China’s share of the photonics market has tripled to more than 30%, while Europe’s has fallen to 15%, according to a previous report by Photonics21, the European Technology Platform for Photonics.

 

Europe still produces world-class laser science; now it needs to make a decisive strategic move by investing to close the scale-up gap,” Rakauskait?- said. “A European startup with a working photonics design should already be able to build it at scale, rather than having European businesses turn to Chinese competitors instead. Europe is still inventing photonics and should be a committed customer of its own technology.”

 

The leading European companies from defence, manufacturing and other industries including Mercedes, Bosch, Volkswagen, last year issued a joint statement urging to strengthen

 

Some of these challenges were addressed in the Chips Act proposal, as Integrated photonics was listed as a key enabling technology alongside traditional electronics. Therefore, according to Rakauskait?-, further measures are needed to help businesses move from research and pilot production to commercially competitive manufacturing.

 

“Strengthening European photonics means backing startups all the way through, from first prototype to full-scale production, with patient capital and policy that treats them as strategic assets. It also means governments recognizing that a photonics startup succeeding at scale is a matter of economic security,” said Rakauskait?-.

 

Can India benefit?

 

India’s ambitions in semiconductor manufacturing, data centres, defence electronics and optical communication could also increase demand for photonics technologies.

 

While the country has a growing ecosystem in laser research and optical engineering, listed investment opportunities remain limited compared with developed markets.

 

For Indian investors, exposure is currently more likely through global semiconductor, networking equipment and industrial technology companies, or international funds focused on next-generation technologies.

 

Should investors pay attention?

Photonics remains a niche segment, but many analysts believe it could become one of the foundational technologies underpinning AI infrastructure over the coming decade.

 

Much as semiconductor companies benefited from the AI boom, firms making optical components, lasers, sensors and networking equipment could also see rising demand as data centres become larger and faster.