Coherent (COHR): A Photonics Leader Capturing AI and Telecom Growth

The global shift toward AI-driven infrastructure and 5G/6G telecom upgrades has created a seismic opportunity for photonics specialists like Coherent (COHR). As a leader in laser and optical technologies, Coherent is uniquely positioned to capitalize on this demand, with its products enabling everything from data center transceivers to advanced industrial automation systems. Recent catalysts—including a significant JPMorgan price target upgrade, strong financial execution, and ambitious margin expansion targets—suggest the stock could be primed for a valuation re-rating. Here's why investors should pay attention.

The JPMorgan Upgrade: A Bullish Catalyst

On June 12, JPMorgan raised its price target on Coherent to $100, up from $86, while maintaining an Overweight rating. The firm highlighted the company's ability to meet its investor-day goals, including a 10%+ revenue CAGR through FY2027, with gross margins projected to hit 39% in FY2026 and 40% in FY2027. JPMorgan now expects $5.70 in EPS by FY2027, 4% above consensus estimates. While cautious on near-term industrial demand, the firm's confidence underscores Coherent's structural growth narrative.

Analyst consensus remains overwhelmingly bullish: 21 brokerages rate the stock as Overweight/Outperform, with an average price target of $97.37 (implying 19% upside from its current $81.50 level). Even bearish outlier GuruFocus's $65.78 GF Value estimate—which relies on historical multiples—cannot dismiss the company's forward-looking strategic moves.

Margin Expansion: The Key to Unlocking Value

Coherent's investor presentation lays out an aggressive margin roadmap, targeting gross margins >42% over the next 3–4 years. This expansion is critical to achieving its >24% operating margin goal, up from 13% in FY2024. The strategy hinges on three pillars:
1. Portfolio Streamlining: Exits from non-core product lines (e.g., consumer electronics) and a focus on high-margin areas like datacenter optics and industrial lasers.
2. Vertical Integration: Ownership of advanced materials and components (e.g., InP lasers, VCSELs) reduces reliance on external suppliers, enabling cost control.
3. Scale in Networking: The Networking segment, which grew 24% YoY in Q3 FY2025, now accounts for ~60% of revenue. Its 1.6T transceivers are a direct response to hyperscalers' demand for AI-driven data throughput.

Recent results validate this path: Q3 gross margins hit 38.5%, up from 34.3% in FY2024, while debt dropped to 2.1x leverage—a clean balance sheet to fuel growth.

Growth Drivers: AI, Telecom, and Industrial Automation

Coherent's diversified exposure to high-growth sectors is its crown jewel:
- AI/Data Centers: The shift to large language models and edge computing requires faster optical interconnects. Coherent's 800G and 1.6T transceivers are already in high demand, with networking revenue up 45% YoY in Q3.
- Telecom/5G: Telecom infrastructure upgrades are driving demand for fiber-optic components, with Coherent's lasers critical to next-gen network deployments.
- Industrial Automation: Lasers are essential for precision manufacturing in EVs, semiconductors, and advanced materials—a $500B+ market by 2030.

Risks and Counterarguments

Bearish concerns linger:
1. Near-Term Margin Pressures: Q4 guidance projects gross margins dipping to 37%–39%, with restructuring costs and soft industrial demand weighing.
2. Sector-Specific Weakness: The Materials segment declined 1% YoY in Q3 due to sluggish consumer electronics.
3. Valuation Debate: Coherent trades at a forward P/E of 19, near its 5-year average, but EV/EBITDA and P/S ratios are above historical norms—a sign of overvaluation?

Counterpoints:
- Margin dips are cyclical; the >42% target remains achievable over the long term.
- Networking's dominance (60% of revenue) and telecom/industrial tailwinds offset weaker segments.
- While valuation multiples are elevated, they're justified by 10%+ CAGR growth and margin expansion—metrics peers may struggle to match.

Why Coherent Could Outperform Peers

While the provided data lacks explicit peer valuation multiples, Coherent's strategic focus and execution suggest it could trade at a premium. Key differentiators include:
- Vertical Integration: Unlike peers reliant on third-party components, Coherent's control over materials reduces costs and improves scalability.
- AI-First Innovation: Its 1.6T transceivers and photonics for AI chips align with hyperscaler spending priorities.
- Debt Reduction: Lower leverage provides flexibility in a macro-sensitive environment.

Investment Thesis: Buy the Dip

Coherent is a “buy” for investors seeking exposure to the AI/telecom revolution. Near-term risks like margin volatility are manageable, while its long-term targets ($>42% gross margins, 10%+ revenue growth) suggest upside potential. The $100 price target from JPMorgan is achievable if networking momentum and margin improvements materialize.

Actionable Takeaway:
- Buy Coherent at current levels, targeting $100+ within 12–18 months.
- Hold if valuation multiples remain stretched but growth remains intact.
- Avoid only if macroeconomic weakness drags on industrial demand beyond FY2026.

In a market chasing AI winners, Coherent's photonics expertise and margin roadmap make it a standout play for the next wave of tech innovation.