Coherent (NASDAQ: COHR) has been one of the standout performers in the optics and photonics space, with shares up roughly 260% over the past 12 months and about 380% over five years. The company, a key supplier to data center giants, now boasts a market capitalization exceeding $64 billion, putting it in the same league as rival Lumentum.
The rally has been fueled by surging demand for AI infrastructure. Coherent manufactures critical components like transceivers, optical modules, fiber lasers, and DUV lasers—products that are essential for the massive clusters powering artificial intelligence. As AI models grow, so does the need for high-speed laser connectivity, and Coherent is well-positioned to capitalize.
Its customer base reads like a who's who of tech: NVIDIA, Microsoft, Amazon, Google, and Meta. NVIDIA's recent investment in Coherent and commitment to expanding their partnership have added further momentum. In the latest quarter, Coherent reported revenue of $1.8 billion, up 27% year-over-year, with gross margin expanding 105 basis points to 36% and earnings per share jumping 55%.
The data center segment now accounts for 75% of revenue, a share that has grown as hyperscalers ramp up spending. Industry-wide, the biggest names plan to invest over $700 billion this year, and NVIDIA has announced a $500 billion partnership with financial services to fund AI projects, some of which could flow to Coherent.
To meet demand, Coherent plans to double its indium phosphide (InP) output by year-end and again by 2027. However, the cyclical nature of the industry poses a risk: if supply catches up with demand, product prices could decline, pressuring margins.
Earnings preview
All eyes are on Coherent's earnings report due Wednesday. Analysts expect revenue of $1.98 billion, up 29.5% year-over-year, and EPS of $1.62, up from $1.00 in the same quarter last year. The company has a history of beating estimates, so the actual numbers could be higher. If forecasts hold, annual revenue would reach $7 billion, up 21%, with $9.66 billion projected for next year.
These figures will be crucial in justifying the stock's valuation. Coherent's forward price-to-earnings ratio stands at 59.67, well above the sector median of 23.67. The earnings report and guidance will determine whether that premium is warranted.
Analyst sentiment vs. options market
Wall Street remains bullish. Raymond James recently raised its price target from $371 to $435, while Rosenblatt Securities lifted its target to $425. In May, Rothschild's Mike Harrison increased his target to $461, and Bank of America moved to $400.
However, the options market tells a different story. Options expiring this Friday imply volatility of 156%, compared to historical volatility of 115%. The volume-based put-to-call ratio is 1.46, and open interest shows a PCR of 1.26, indicating more puts than calls. This suggests traders are hedging or speculating on a downside move, which could signal a pullback after the stock's meteoric rise.
Investors will be watching not only the headline numbers but also management's outlook on capacity expansion and pricing. The company's ability to sustain growth in a cyclical industry will be key. For context, Lumentum's valuation has also been stretched, and other AI-related names face similar earnings tests. The broader market's reaction to AI earnings will also play a role, as seen in JPMorgan's S&P 500 target.
With the stock up 260% in a year, the bar is high. The earnings report will likely determine whether Coherent can justify its valuation or if the options market's caution is warranted.
This article is for informational purposes only and does not constitute financial advice.
