Coherent Corp: Riding the Optical Networking Wave to Long-Term Dominance

Philip CarterMonday, Jun 2, 2025 6:05 pm ET
65min read

In an era where data consumption is growing exponentially—driven by AI, 5G, and

hyperscale data
centers—Coherent Corp (COHR) stands at the forefront of a seismic shift in optical networking. By strategically exiting non-core businesses, doubling down on its photonics expertise, and leveraging its indium phosphide (InP) technology, the company is positioned to dominate the $2+ billion optical circuit switch (OCS) market and AI data center segments. Investors who act now can capitalize on a compelling mix of margin expansion, structural tailwinds, and a disciplined balance sheet.

Portfolio Optimization: Pruning for Profitability

Coherent's exit from non-core businesses—such as legacy industrial segments—has been a masterstroke. This move has enabled the company to redirect resources toward its core strengths: AI-driven data center infrastructure and telecom optical networking. The results are stark: fiscal 2025 revenue soared 28% year-over-year to $1.35 billion, while non-GAAP EPS surged 357% to $0.74. Crucially, the company reduced debt by $118 million, deleveraging its balance sheet to fuel future growth. This focus on high-margin, high-growth markets is the bedrock of its long-term value creation.

Technological Leadership: The InP Advantage

At the heart of Coherent's moat lies its indium phosphide (InP) laser technology—a foundational component of high-speed optical transceivers. By tripling its InP capacity, the company can now produce 1.6T and 3.2T transceivers, which are critical for scaling AI data centers. These transceivers, combined with its leadership in optical circuit switches (OCS), give Coherent a 2–3 year lead over competitors. For context, the OCS market alone is projected to hit $2 billion by 2030, and Coherent's first revenue from OCS this quarter underscores its early-mover advantage.

Margin Trajectory: A Path to 42%+ Gross Margins

The numbers speak for themselves. In fiscal 2025, GAAP gross margins jumped 499 basis points to 34.1%, while non-GAAP margins rose 293 basis points to 37.7%. Management has set its sights even higher: 42%+ gross margins by fiscal 2027, driven by scale, vertical integration (in-house lasers, photodetectors, and passive optics), and cost discipline. With AI data centers demanding 800G/1.6T transceivers—products with 50%+ gross margins—this trajectory is not only achievable but likely conservative.

Investor Day Catalyst: A Blueprint for Dominance

The May 28, 2025, Investor Day was a masterclass in strategic clarity. Key takeaways include:- CAGR Targets: 10–15% for datacenter/telecom segments through 2030, fueled by AI-driven demand.- R&D Focus: Continued investment in OCS, CPO (co-packaged optics), and 6.4T transceivers.- Balance Sheet Strength: Over $1 billion in cash and a deleveraged capital structure.

This event solidified Coherent's narrative as a technical leader with a clear path to market share gains. Analysts now see the stock as a “Strong Buy”, with a $106 price target—upside of 28% from current levels.

Addressing Near-Term Softness: A Drop in the Bucket

Critics point to softness in industrial laser sales—a segment that now represents just 20% of revenue—as a concern. But this misses the forest for the trees. The 80% of revenue tied to datacenter/telecom is growing at 20%+ annually, with AI adoption rates accelerating. Even if industrial sales flatline, the structural tailwinds in photonics and optical networking will drive $4 billion+ revenue by 2030. Coherent's R&D efficiency—~10% of revenue, half that of peers—ensures it can innovate without sacrificing margins.

Conclusion: A Buy Now, Pay Later Opportunity

Coherent is a textbook example of a company turning strategic bets into long-term value. With margin expansion, technological leadership, and $2 billion+ addressable markets in optical switching and AI data centers, the stock is primed to outperform. While near-term macro risks exist, they pale against the secular demand for faster, more efficient data networks. For tech investors seeking a multi-year winner, COHR is a no-brainer. The question isn't whether to buy—it's why you haven't already.

Act now before the market catches up.