Hook and thesis
Coherent is not a generic optics play. Its compound semiconductor platforms, deployed inside networking optics and high-speed modules, give it a manufacturing moat that matters when hyperscale AI clusters drive demand for denser, higher-power photonics. Recent results and bookings show demand is real - revenue beats and raised guidance have come through, and the market is just beginning to price in multi-node AI networking cycles.
We think there is an actionable mid-term opportunity to buy into that re-rating. The trade is simple: take a long position at current levels to capitalize on AI-driven optical module demand and capacity expansion tailwinds, while keeping an explicit stop for execution risks and a target that reflects a sensible multiple expansion from current valuation.
Why the market should care - the business in plain terms
Coherent makes engineered materials, opto-electronic components, and lasers across three segments: Networking, Materials, and Lasers. The Networking segment specifically leverages compound semiconductor technology platforms to build optical connectivity hardware used by cloud and data-center customers. Those platforms - the same family of technologies that includes indium phosphide - are critical to making high-speed transceivers and coherent optics that move data inside and between AI clusters.
When hyperscalers build clusters beyond 100,000 nodes, raw GPU compute is only half the story. The fabric that connects those nodes becomes a bottleneck. Companies that can deliver high-density, high-bandwidth optics at scale get structural demand - and Coherent is already reporting record bookings for optical connectivity equipment, according to recent coverage.
Support for the thesis - read the numbers
- Market scale: the company trades with a market cap of roughly $46.12 billion and enterprise value near $47.94 billion, so any re-rating will move a large bucket of capital.
- Recent performance: Coherent beat on Q2 with EPS of $1.29 and revenue of $1.69 billion, exceeding consensus and prompting bullish guidance for the next quarter. Management guided Q3 adjusted EPS $1.28 - $1.48 and revenue $1.7 - $1.84 billion (reported 02/04/2026).
- Valuation snapshot: trailing earnings imply a P/E near 240, price-to-sales about 7.22, and EV/sales 7.62. Those multiples are rich, but they reflect both strong top-line momentum and limited supply of scaled compound-semiconductor capacity.
- Technicals and positioning: Momentum indicators are constructive - MACD is bullish and RSI sits around 61 - and short interest has been modest relative to float with days to cover near 1-2 on recent settlements, which limits crowded squeeze risk but also means moves can be sharp on news.
- Cash flow and leverage: the company reported free cash flow of negative $103.6 million in the reported snapshot, and balance-sheet ratios show modest leverage with debt-to-equity around 0.39 and current ratio about 2.23, leaving room to finance capacity expansion if needed.
Valuation framing
At roughly $46 billion market cap and an EV near $48 billion, Coherent sits at premium multiples today. P/E in the 230-240 range and EV/EBITDA north of 45 reflect two facts: (1) the market expects significant growth and/or margin expansion from networking optics tied to AI, and (2) supply constraints on compound-semiconductor substrates and modules give incumbents pricing power.
That said, the absolute multiples demand delivery - not just bookings. A sensible way to think about valuation is to treat current pricing as pricing-in fast growth in the Networking segment. If revenue keeps compounding in the high single-digit to low double-digit percentage range with improving margins from scale, the premium is justified. If growth normalizes or bookings don't translate to durable revenue, multiples will compress quickly.
Catalysts
- Continued beat-and-raise cadence: management already beat in Q2 and guided Q3 reasonably healthy - another quarter of upside on revenue or margin would be a clear rerate catalyst.
- Public confirmation of expanded wafer capacity or new 6-inch Indium Phosphide lines - any operational update on manufacturing scale-up would materially de-risk the moat story.
- Large hyperscaler purchase orders or multi-year supply agreements disclosed in an earnings cycle - this would convert bookings momentum into visible revenue streams.
- Broader optical networking cycle acceleration as cloud customers disclose cluster expansions - cross-company commentary (Broadcom and other optics players have hinted at this) tends to lift the whole group.
Trade plan (actionable)
My trade is a mid-term long with defined risk. I expect this trade to run into the next re-rating window driven by quarterly updates and capacity announcements.
| Position | Price |
|---|---|
| Entry | $232.33 |
| Stop Loss | $216.00 |
| Target | $270.00 |
Time horizon: mid term (45 trading days). I expect this window to capture a post-earnings re-rating and potential incremental news on bookings or capacity. If the company prints another quarter of upside or announces a capacity expansion, the trade can be trimmed or the stop trailed higher. If nothing materializes and price stalls near the entry after 45 trading days, exit and reassess.
Position sizing and risk management
This is a trade to allocate a modest active-share weight in a growth sleeve given the high multiples. Use the stop at $216 to limit downside - that stop sits under recent short-term moving averages and is roughly 7% below entry. If the stop is hit, the thesis has materially weakened: either demand has slowed materially or the market hates the valuation without execution evidence.
Note: the plan expects nimble management of the position. If the company announces meaningful structural wins or capacity investments, shift to a longer-term view and re-price targets against updated fundamentals.
Risks and counterarguments
- Valuation vulnerability - trailing P/E near 240 and EV/EBITDA above 45 leave little room for revenue misses. One quarter of softening orders or margin misses would likely trigger a rapid multiple compression.
- Execution and capex risk - scaling compound-semiconductor lines (including larger wafer formats) is capital- and time-intensive. Delays or cost overruns would slow the cadence of revenue conversion from bookings.
- Competition and commoditization - incumbents and well-capitalized peers could accelerate capacity expansion, eroding pricing power and shortening the window for a premium multiple.
- Macro and cyclical spend risk - hyperscaler expansion is cyclical and tied to broader capex budgets. A macro slowdown or shift in cloud timing would reduce near-term demand.
- Cash flow profile - recent free cash flow was negative (about $103.6 million in the reported snapshot), which signals the company may need to fund growth through a mix of operating improvement and capital; that can pressure margins in the short run.
Counterargument to the thesis
It's reasonable to argue Coherent is already priced for perfection. Premium multiples assume both sustained high growth and margin expansion. If the AI networking story proves noisy - for example, if hyperscalers diversify suppliers rapidly or choose different interconnect architectures - Coherent's growth could slow and the stock could derate quickly. That is why position sizing and a tight stop are central to the trade.
What would change my mind
I would reduce conviction if any of the following occur: (1) the company misses revenue or EPS in the next reported quarter and guidance is cut; (2) management discloses delays or cost issues in capacity expansion; or (3) bookings trend reverses and public hyperscaler commentary signals a slowdown in demand growth. Conversely, my conviction rises if Coherent discloses a multi-year supply agreement with a major cloud customer or confirms a successful scale-up of larger wafer manufacturing that materially increases throughput and lowers unit cost.
Conclusion
Coherent's combination of compound-semiconductor know-how and growing bookings into optical connectivity equipment creates a credible moat that could capture AI networking upside. The trade outlined here is a disciplined mid-term long: entry at $232.33, stop $216.00, and a target of $270.00 over 45 trading days. Valuation is rich, so execution and evidence of durable revenue conversion are required. Manage size, respect the stop, and be ready to act should the company deliver concrete capacity or supply agreements that turn bookings into recurring revenue.