Coherent Corp (COHR): Riding the Optical Wave in AI's Data Infrastructure Surge

The race to power the next generation of artificial intelligence (AI) and high-speed data infrastructure is on, and Coherent Corp (COHR) is positioned to win it. With its leadership in advanced optical components—particularly 800G and 1.6T transceivers—and a strategic focus on margin expansion, the company is capitalizing on secular trends in AI-driven networking, telecom recovery, and industrial innovation. A V-shaped technical rebound in its stock price since late 2024 further underscores its potential as a buy for investors willing to ride this wave.

The Optical Edge: 800G/1.6T Transceivers and Vertical Integration

Coherent's crown jewels are its 800G and 1.6T transceivers, which are critical to enabling the exabyte-scale data processing required for AI infrastructure. These transceivers are the “highways” that connect servers, storage, and networking equipment in hyperscale data centers. In Q2 2025, the Networking segment—driven by these products—surged 56% year-over-year, fueled by AI adoption and telecom recovery.

The company's vertical integration provides a moat against competitors:
- Indium phosphide platforms: Tripled in production capacity year-over-year, enabling cost-efficient manufacturing of EML (electro-absorption modulated laser) and CW (continuous-wave) lasers.
- Silicon photonics: A key enabler for scaling 1.6T transceivers, with plans to integrate 200G differential EML and VCSEL (vertical-cavity surface-emitting laser) technologies.
- Optical Circuit Switch (OCS) platform: Secured its first customer order in 2025, offering latency-efficient data center routing.

While market share figures aren't disclosed, Coherent's 79% year-over-year datacom revenue growth in Q3 2025—driven by AI and telecom—speaks to its dominance. Analysts project the 800G/1.6T market to grow at a ~40% CAGR through 2033, with Coherent's technology breadth positioning it to capture a disproportionate share.

Margin Expansion: A Key Catalyst for Profitability

Coherent isn't just growing top-line revenue—it's also boosting margins. In Q2 2025, non-GAAP gross margin hit 38.2%, up 363 basis points year-over-year, thanks to pricing optimization, cost reductions, and operational efficiencies. Management has set a target of >40% gross margin, achievable as silicon photonics integration scales and 1.6T transceivers ramp.

This margin expansion is critical. While competitors like II-VI (IIVI) and Lumentum (LITE) face margin pressures from commoditization, Coherent's high-margin niches (e.g., AI-driven data centers and telecom upgrades) shield it from price wars. The company's strategic portfolio optimization—including divesting non-core lithium battery assets—further focuses resources on these high-growth areas.

Diversified End-Market Resilience

Coherent's diversified revenue streams reduce dependency on any single sector:
1. AI Data Centers: Hyperscalers like Amazon, Google, and Meta are expanding AI compute capacity, driving demand for Coherent's transceivers.
2. Telecom: Sequential revenue growth of 16% in Q2 2025 reflects recovery in data center interconnects and 5G/6G rollouts.
3. Industrial: While this segment faces near-term softness (e.g., automotive), its long-term prospects in advanced manufacturing tools remain strong.

Technical Rebound and Analyst Optimism

Coherent's stock has undergone a dramatic turnaround. After plunging ~24% year-to-date early in 2025 due to guidance concerns, it surged +95% from April to July 2025, fueled by strong Q3 results and bullish technicals. Key catalysts:
- Q3 2025 revenue hit $1.5B (+24% YoY), with AI-related sales up 54% YoY.
- Analyst consensus: A $114.27 price target implies +27% upside from July 2025 levels.
- Institutional buying: Funds like Wellington Management and Point72 increased stakes, while insiders like CEO Jim Anderson bought shares.

Risks to Consider

• Near-term industrial softness: Automotive sector weakness may linger.
• Competitor catch-up: Rivals like Cisco and Innolight are ramping 1.6T transceivers.
• Execution risks: Scaling 3.2T transceivers and OCS platforms requires flawless execution.

Investment Thesis: Buy on Dips, Hold for the Long Term

Coherent's secular growth tailwinds—AI infrastructure, telecom upgrades, and silicon photonics innovation—make it a compelling long-term play. Near-term volatility offers buying opportunities:
- Entry point: Look for dips below $85, supported by the 20-day moving average.
- Hold for: 1–3 years to capture margin expansion, 1.6T/3.2T ramp-ups, and OCS adoption.
- Exit signal: If gross margins stall below 38% or AI spending weakens significantly.

Historical backtests from 2020–2025 reveal that a strategy of buying COHR on dips below the 20-day moving average and holding for 20 days delivered an 83.07% total return, outperforming benchmarks with a 30.90% CAGR. Despite a maximum drawdown of -52.58%, the strategy's Sharpe ratio of 0.55 underscores its risk-adjusted resilience. These results align with Coherent's long-term fundamentals, suggesting that disciplined dips offer entry points to capitalize on its growth trajectory.

With a PEG ratio of 0.78 (vs. the S&P 500's ~2.0), Coherent is undervalued relative to its growth trajectory. The V-shaped rebound in its stock and robust fundamentals suggest now is the time to buy COHR for the AI infrastructure boom.

Stay tuned to Coherent's May 2025 Investor Day for further details on its long-term roadmap and financial targets.