AI Data Centers And Texas Manufacturing Will Strengthen Future Fundamentals

Key Takeaways

• Robust demand from AI and high-performance datacenters, plus key Apple contracts, is driving growth and strengthening Coherent's core photonics and communications segments.
  
• Internal manufacturing investments, business divestitures, and expanding services boost margins, support debt reduction, and deliver more stable, higher-quality recurring revenue.
  
• Mounting competition, economic uncertainty, cyclical demand, heavy investment needs, and reliance on major customers threaten Coherent's growth consistency and earnings stability.

Catalysts

Develops, manufactures, and markets engineered materials, optoelectronic components and devices, and optical and laser systems and subsystems for the use in the industrial, communications, electronics, and instrumentation markets worldwide.

• The ongoing expansion of AI datacenter infrastructure and high-performance computing is propelling structural growth in demand for advanced optical transceivers (800G, 1.6T, and beyond), optical circuit switches, and related photonics components, which is fueling robust sequential order growth and sustained revenue momentum in Coherent's datacom and communications business.
  
• Major investments in internal manufacturing-particularly the world's first 6-inch indium phosphide production line in Texas-are providing scale and cost structure advantages, as well as improved supply chain resiliency, enabling Coherent to boost volumes, lower production costs, and expand gross margins.
  
• The multiyear agreement with Apple for next-generation VCSELs, leveraging Coherent's U.S.-based manufacturing, is set to bring incremental high-margin revenues beginning in the second half of calendar 2026, diversifying and stabilizing the customer base and further enhancing gross margin performance.
  
• Portfolio streamlining-such as the sale of the low-margin Aerospace & Defense business-will allow Coherent to accelerate debt paydown, optimize its capital allocation into higher-growth, higher-margin core segments, directly lifting both net margins and EPS.
  
• Recurring services and consumables tied to an expanding installed base of industrial lasers are contributing a growing portion of stable, higher-margin revenue, which is expected to drive long-term improvement in earnings quality and support more predictable cash flows.

Coherent Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Coherent's revenue will grow by 9.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from -1.4% today to 9.5% in 3 years time.
• Analysts expect earnings to reach $732.0 million (and earnings per share of $4.68) by about September 2028, up from $-80.6 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 31.7x on those 2028 earnings, up from -171.1x today. This future PE is greater than the current PE for the US Electronic industry at 23.1x.
• Analysts expect the number of shares outstanding to grow by 0.74% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.84%, as per the Simply Wall St company report.

Coherent Future Earnings Per Share Growth

Risks

• Heightened competition from low-cost Asian manufacturers, particularly in optical transceivers (e.g., China-based Optilink growing 60-150%), may intensify pricing pressure and risk commoditization, which could compress gross margins and threaten Coherent's market share in core growth areas.
  
• Macroeconomic uncertainties, including persistent high cost of capital, tariff volatility, and industrial end market softness, have led Coherent to take a cautious near-term and potentially long-term outlook on its industrial lasers and materials businesses, risking inconsistent revenue growth and increased revenue variability.
  
• Past volatility and downturns in silicon carbide demand-previously a headwind-highlight the cyclical and unpredictable nature of some industrial end-markets, exposing Coherent to possible future revenue shortfalls and margin instability if demand falls again.
  
• Ongoing need for significant capital investment in new manufacturing (such as the ramping of 6-inch indium phosphide capacity and Sherman, TX facility upgrades) and technology platforms could increase financial risk, especially if returns on these investments are delayed or if gross margin improvements do not materialize as expected, thereby impacting net margins and earnings.
  
• Customer concentration and lumpiness in demand, especially with large partners like Apple and major hyperscalers, could expose Coherent to abrupt revenue swings and reduce earnings stability if any key relationship weakens, contracts are lost, or design transitions result in order slowdowns.

Valuation

• The analysts have a consensus price target of $113.368 for Coherent based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $135.0, and the most bearish reporting a price target of just $85.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $7.7 billion, earnings will come to $732.0 million, and it would be trading on a PE ratio of 31.7x, assuming you use a discount rate of 8.8%.
• Given the current share price of $88.47, the analyst price target of $113.37 is 22.0% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.