Coherent Corp's Strategic Position in the Optical Networking Revolution: A High-Conviction Buy for 2025 and Beyond

In the rapidly evolving landscape of optical networking and AI-driven datacom, Coherent Corp (COHR) has emerged as a pivotal player, leveraging cutting-edge photonics, strategic manufacturing expansion, and a sharp focus on high-margin markets to unlock long-term shareholder value. With the global demand for AI infrastructure surging, Coherent's alignment with this megatrend—coupled with its innovative next-generation Optical Circuit Switch (OCS) platform and disciplined operational execution—positions the company as a high-conviction buy for 2025 and beyond.

AI-Driven Datacom Growth: A Catalyst for Revenue Surge

The AI revolution is reshaping data center infrastructure, creating insatiable demand for high-speed optical transceivers. Coherent's leadership in 800G and 400G modules has already positioned it as a critical supplier to hyperscalers, with its Networking segment projected to grow by 48% in 2025. This growth is fueled by the need for 1.6T and 3.2T transceivers to support AI workloads, a space where Coherent's vertically integrated manufacturing of indium phosphide (InP) and VCSELs provides a cost and supply chain advantage.

The company's recent launch of the world's first six-inch InP wafer line in Texas—tripling production capacity—ensures it can meet the explosive demand for EML and CW lasers, which are foundational to next-gen transceivers. This strategic move not only secures Coherent's position in the $3.4 billion Communications end-market but also strengthens its ability to scale as AI infrastructure requirements evolve.

Next-Gen OCS Innovation: A Game-Changer for Optical Networking

Coherent's Optical Circuit Switch (OCS) platform represents a paradigm shift in optical networking. Built on field-proven digital liquid crystal technology, the OCS offers a non-mechanical, power-efficient alternative to traditional MEMS-based switches. This innovation has already secured its first customer order, with revenue expected in 2025, and is projected to expand Coherent's addressable market by $2 billion.

The OCS's ability to dynamically reconfigure optical interconnections in real time makes it ideal for AI data centers, where flexibility and scalability are paramount. By enabling dynamic routing of optical signals without mechanical components, the OCS reduces latency and power consumption, addressing two of the most pressing challenges in high-performance computing. Coherent's OCS was even awarded the “Best Product” title at ECOC 2024, underscoring its technological leadership.

Gross Margin Expansion: A Testament to Operational Discipline

Coherent's financial performance in 2025 has been nothing short of stellar. The company reported record revenue of $5.81 billion, a 23% year-over-year increase, with non-GAAP gross margin expanding by 358 basis points to 37.9%. This margin expansion is driven by strategic pricing optimization, cost reductions, and vertical integration of critical components like InP and VCSELs.

The divestiture of its lower-margin aerospace and defense business for $400 million further streamlined operations, allowing Coherent to focus on high-ROI areas. The proceeds from this exit will accelerate debt reduction and boost non-GAAP earnings per share. With a long-term goal of achieving a 42% non-GAAP gross margin, Coherent's operational discipline and cost leadership position it to outperform peers in both top-line and bottom-line growth.

Strategic Partnerships and R&D: Fueling Future Growth

Coherent's partnership with Apple for next-gen VCSELs, manufactured in its Texas facility, is a strategic win that aligns with Apple's U.S. manufacturing priorities. This multiyear agreement, expected to contribute revenue starting in 2026, will further scale Coherent's capacity and margins.

On the R&D front, Coherent continues to push boundaries. Its silicon photonics-based 1.6T transceivers, 2x400G-FR4 Lite modules, and diamond-silicon carbide (SiC) thermal management solutions address critical bottlenecks in AI infrastructure, such as power consumption and heat dissipation. These innovations not only enhance performance but also reduce total cost of ownership for data center operators, reinforcing Coherent's value proposition.

Investment Thesis: A High-Conviction Buy

Coherent's strategic alignment with the AI-driven datacom boom, coupled with its gross margin expansion and next-gen OCS innovation, creates a compelling investment case. The company's ability to vertically integrate critical components, secure high-margin partnerships, and execute on R&D-driven product differentiation positions it to outperform in a market expected to grow from $10 billion to $30 billion by 2030.

With a robust balance sheet, strong cash flow generation, and a clear roadmap for margin expansion, Coherent is well-positioned to capitalize on the optical networking revolution. Investors seeking exposure to the AI infrastructure boom should consider Coherent as a core holding, given its leadership in photonics, operational discipline, and long-term growth potential.

Final Verdict: Coherent Corp is a high-conviction buy for 2025 and beyond. Its strategic initiatives, technological edge, and financial discipline make it a standout in the optical networking sector, offering both growth and margin upside in a high-growth market.