Coherent's Earnings Beat and Strategic Shifts: A Deep Dive into Q4 Performance and FY2026 Outlook

In the ever-evolving photonics sector, Coherent Corporation (COHR) has emerged as a standout performer, leveraging its technical expertise and strategic agility to navigate the dual forces of AI-driven demand and macroeconomic headwinds. The company's Q4 2024 earnings report and FY2025 results underscore a compelling narrative of resilience and innovation, even as short-term stock volatility persists. For investors, the question is whether Coherent's current trajectory aligns with its long-term growth potential in a market poised for transformation.

Q4 2024: A Tale of Margin Expansion and Strategic Clarity

Coherent's Q4 2024 results were a masterclass in operational execution. The company reported quarterly revenue of $1.314 billion, a 9.1% year-over-year increase, driven by robust demand for its 1.6T datacom transceivers and optical circuit switches (OCS). These products, tailored for AI datacenters, are not just incremental upgrades but foundational components for next-generation infrastructure. The GAAP gross margin expanded by 437 basis points to 32.9%, while the non-GAAP margin hit 37.2%, reflecting disciplined cost management and pricing power in high-margin segments.

The earnings surprise was equally striking: a non-GAAP EPS of $0.61, up 49% year-over-year, outperformed the Zacks Consensus Estimate by 7.53%. This outperformance was fueled by Coherent's ability to capitalize on AI-driven demand while optimizing its cost structure. CEO Jim Anderson highlighted the “ongoing strength in the Datacom transceiver business,” a segment where Coherent's silicon-photonics expertise gives it a clear edge over peers.

Strategic Shifts: Divesting to Focus on High-Growth Markets

The most significant strategic move in Q4 2024 was the announcement to sell Coherent's Aerospace and Defense business, expected to close in Q1 2026. This decision, while reducing near-term revenue by approximately $20 million, signals a deliberate pivot toward high-growth markets. The Aerospace and Defense segment, though profitable, is capital-intensive and less aligned with the company's core strengths in photonics. By divesting it, Coherent can redirect resources to AI datacenters, industrial lasers, and emerging energy technologies—a move that mirrors broader industry trends.

The photonics sector is undergoing a seismic shift as hyperscale datacenters prioritize energy efficiency and scalability. Coherent's introduction of diamond silicon carbide composites for AI cooling and its 600W excimer laser platform for fusion energy exemplify its commitment to solving hard technical problems. These innovations not only expand Coherent's addressable market but also create moats against competitors like Lumentum and II-VI (now part of Lumentum), which are more reliant on modulator and switch technologies.

FY2025: Record Revenue and Debt Reduction

For the full fiscal year 2025, Coherent reported revenue of $5.81 billion, a 23.4% increase, with non-GAAP gross margins expanding by 358 basis points to 37.9%. The company's ability to grow revenue while improving margins is rare in capital-intensive industries and speaks to its operational discipline. CFO Sherri Luther noted that the margin expansion enabled Coherent to repay $437 million in debt, a move that strengthens its balance sheet and provides flexibility for future investments.

The company's stock has added 23% year-to-date, outperforming the S&P 500's 9.6% gain. However, this performance has not been without volatility. A reveals sharp swings tied to macroeconomic concerns and sector-specific risks. For instance, a 15% pullback in early 2025 followed broader market jitters over AI adoption timelines. Yet, Coherent's fundamentals remain robust, with a Zacks Rank #1 (Strong Buy) rating and a consensus EPS estimate of $4.56 for FY2026.

FY2026 Outlook: Navigating Uncertainty with Confidence

Coherent's guidance for Q1 2026 is cautiously optimistic. Excluding the Aerospace and Defense business, revenue is projected to range between $1.46 billion and $1.60 billion, with non-GAAP EPS expected to be $0.93–$1.13. The company anticipates gross margins of 37.5%–39.5%, a slight contraction from FY2025's 37.9% but still above industry averages. This margin stability, combined with a 191% year-over-year increase in non-GAAP EPS, positions Coherent to outperform in a sector where margin compression is a common challenge.

The key risks lie in execution. While Coherent's product roadmap is ambitious, scaling production for 1.6T transceivers and OCS platforms will require significant capital. Additionally, the photonics sector is highly competitive, with rivals like Lumentum and startups in the silicon-photonics space vying for market share. A shows the market expanding at a 13.1% CAGR, but capturing this growth will demand continued R&D investment and operational excellence.

Investment Thesis: A Long-Term Play on Photonics Innovation

For long-term investors, Coherent represents a compelling opportunity to bet on the photonics revolution. Its strategic focus on AI datacenters—a $25 billion market by 2030—aligns with secular trends, while its vertical integration and R&D capabilities provide a durable competitive edge. The divestiture of the Aerospace and Defense business, though a near-term drag on revenue, is a prudent move to streamline operations and focus on high-margin growth areas.

However, short-term volatility remains a concern. A reveals a beta of 1.2, indicating higher sensitivity to market swings. Investors should monitor macroeconomic indicators, particularly interest rates and AI adoption cycles, which could impact datacenter spending. That said, Coherent's strong cash flow generation and debt reduction efforts provide a buffer against near-term headwinds.

Conclusion: Buy for the Long Haul

Coherent's Q4 2024 results and FY2026 outlook paint a picture of a company in transition. By shedding non-core assets and doubling down on AI and energy applications, it is positioning itself to capitalize on the photonics sector's most promising growth drivers. While execution risks and market volatility warrant caution, the company's technical prowess, margin resilience, and strategic clarity make it a strong candidate for long-term investment. For those willing to ride out the near-term noise, Coherent offers a rare blend of innovation and operational discipline in a sector poised for decades of growth.

Final Recommendation: Buy COHR for a 3–5 year horizon, with a stop-loss at $120 (50% below current price) to mitigate downside risk.