Hook & thesis
Coherent (COHR) has quietly moved from a niche industrial-laser maker into a critical supplier for AI-era data centers and optical networking. The stock sits at $224.03 after a recent run, but recent quarterly beats and elevated bookings for optical connectivity give the company a clearly articulated demand story that could justify multiple expansion — if execution holds.
My thesis is straightforward: this is a buy for patient investors prepared to hold through a roughly 180-trading-day cycle to see whether the current order strength converts to revenue and cash flow. The trade is actionable with a concrete entry and stop because valuation is stretched today (trailing P/E north of 200), so capital should be staged and risk-managed.
What Coherent does and why the market should care
Coherent designs and manufactures engineered materials, opto-electronic components and devices, and lasers used across industrial, communications, electronics and instrumentation markets. The business sits in three segments: Networking, Materials and Lasers. Networking products - high-speed optical modules and connectivity - are what put Coherent on the map for hyperscalers building AI-optimized data centers. The Lasers business is meaningful for semiconductor capital equipment, display capex and precision manufacturing.
Why it matters now: as AI clusters scale, networking becomes the bottleneck. Reports and company commentary indicate that hyperscalers are ordering more high-speed optics. Coherent has also flagged record bookings for optical connectivity equipment and delivered a beat in its latest quarter tied to data-center and communications demand. If these orders convert, top-line growth and operating leverage can materially improve margins and cash generation over the next several quarters.
Recent performance and the numbers that matter
- Shares trade at $224.03 with a market cap roughly $42.5B.
- Coherent posted Q2 EPS of $1.29 and revenue of $1.69B, both beating consensus; management guided Q3 adjusted EPS $1.28 - $1.48 and revenue $1.70 - $1.84B (reported 02/04/2026).
- Valuation is elevated: price-to-earnings is around 215x (trailing), price-to-sales ~6.55x and EV/EBITDA roughly 41.9x.
- Trailing free cash flow was negative at -$103.6M, and enterprise value sits near $43.7B.
- Balance-sheet indicators are reasonable: debt-to-equity about 0.39, current ratio ~2.23 and quick ratio ~1.29 — which suggests liquidity to fund growth and working capital while bookings convert.
- Technical context: 52-week high/low range is $247.15 / $45.58. Momentum indicators are neutral-to-positive (10-day SMA $221.93, 50-day SMA $198.74, RSI ~57) but MACD shows short-term bearish momentum.
Valuation framing
At roughly $42.5B market cap and EV near $43.7B, Coherent is priced like a high-growth network/optics franchise rather than a legacy laser maker. The trailing P/E north of 200 reflects the market's expectation of sustained strong earnings or simply compressed trailing EPS; Q2's beat and Q3 guidance help justify a premium, but the premium is still steep.
Two qualitative points on valuation: first, the stock traded as low as $45.58 in the 52-week window when visibility was poor — that shows how sentiment can swing. Second, the current multiple is only rational if growth and margin expansion are durable; with FCF still negative recently (-$103.6M), the company needs to convert bookings into consistent cash generation to satisfy multiple expansion. For patient investors, valuation is a risk you get paid for only if execution follows.
Catalysts to watch (2-5)
- Book-to-bill and backlog conversion - follow quarterly bookings and backlogs. If the reported record bookings for optical connectivity translate to higher revenue in the coming quarters, the market will reward the stock.
- Upcoming quarterly results and guidance re-affirmation - management set Q3 revenue guidance of $1.70 - $1.84B; upward revisions would validate the thesis.
- Hyperscaler spending on AI networking - confirmation via customer commentary or public cloud capex cycles that optical spend is increasing materially.
- Improvement in free cash flow and margin expansion - visible FCF turn positive or materially narrower operating losses would be a major positive.
Trade plan - actionable entry, stop and target
Plan for a patient, staged long with clear risk control:
- Entry: $215.00. Start a position here; if price pulls back into the low $200s, add the remainder of the intended size.
- Stop loss: $195.00. If price breaches $195, technical setup and the thesis are compromised.
- Target: $275.00. This is the primary take-profit point over the trade duration if bookings convert and guidance gets raised.
- Horizon: long term (180 trading days). I expect it will take several quarters for orders to flow through manufacturing, for margins to expand and for FCF to normalize; that justifies a roughly six- to nine-month holding period.
- Sizing: Given the high multiple and recent negative FCF, keep any single position size modest (e.g., no more than 2-4% of portfolio) and scale in on weakness or positive fundamental confirmation.
Risks and counterarguments
- Rich valuation: The trailing P/E is above 200 and EV/EBITDA is ~41.9x. If revenue growth disappoints or EPS does not expand, the stock can re-rate sharply lower. A stretched multiple requires execution.
- Negative recent FCF: Free cash flow was -$103.6M; until FCF turns sustainably positive, the company is relying on working capital and operating performance to justify its valuation.
- Macro / capex cyclicality: Networking and laser demand can be lumpy and tied to hyperscaler capex cycles and semiconductor equipment spending. A pullback in AI buildouts would hit Coherent's higher-margin networking products.
- Competition and pricing: The optical and photonics space is competitive; larger peers and component-level competition could pressure ASPs and margins.
- Execution risk: Converting record bookings into revenue requires supply-chain stability and manufacturing execution. Any hiccups would delay revenue recognition and cash flow improvement.
Counterargument: You could reasonably argue the stock is too expensive today and that buying into such a high multiple prior to clear FCF recovery is speculative. If you prioritize conservative valuation over growth story, you should wait for either a meaningful pullback toward the $150s or clear evidence that FCF and margins are improving before initiating a material position.
What would change my mind
I would reduce conviction or move to a neutral stance if one or more of the following occurs: (1) bookings and backlog stop showing sequential improvement, (2) free cash flow remains negative after two more quarters despite revenue growth, (3) guidance is lowered or pulled back, or (4) hyperscaler spend on optics visibly cools.
Conversely, I would increase conviction if Coherent reports consecutive quarters of revenue beats with positive FCF, margin expansion and confirmed multi-year contracts with hyperscalers or large enterprise customers.
Conclusion
Coherent is a coherent - and compelling - trade for patient investors who believe AI networking and optical connectivity demand will be durable. The recent Q2 beat ($1.29 EPS on $1.69B revenue) and management guidance give the thesis teeth, but valuation is expensive and cash conversion is still a work in progress.
My recommendation: initiate a modest position at $215.00, use a $195.00 stop, and target $275.00 over a long-term (180 trading days) horizon. Size the trade conservatively and be prepared to scale into strength or tighten exposure if quarterly cash conversion and margin expansion do not materialize.