Is Coherent Positioned to Dominate the AI-Driven Datacenter Infrastructure Market?

The AI revolution is reshaping global datacenter infrastructure, and Coherent Inc. (COHR) has emerged as a pivotal player in this transformation. With its 1.6T transceivers, silicon carbide (SiC) platform, and vertically integrated manufacturing strategy, the company is capitalizing on surging demand for high-speed, energy-efficient optical components. However, rising competition, pricing pressures, and supply chain volatility pose challenges. This analysis evaluates whether Coherent's AI-focused product pipeline and financial momentum justify a long-term investment thesis.

Financial Momentum and Strategic Focus

Coherent's fiscal 2025 results underscore its strong positioning in the AI-driven market. The company reported record revenue of $5.81 billion, a 23% year-over-year increase, driven by a 51% revenue surge in AI datacenters and communications. Non-GAAP gross margins expanded by 358 basis points to 37.9%, reflecting operational efficiency gains. These metrics highlight Coherent's ability to scale production while maintaining profitability, a critical factor in capital-intensive industries.

The company's financial discipline further strengthens its appeal. Coherent repaid $437 million in debt during 2025, enhancing liquidity and flexibility for future investments. This fiscal prudence is particularly valuable in an environment where rivals may struggle with debt burdens amid capital-intensive expansions.

1.6T Transceivers: A Cornerstone of AI Infrastructure

Coherent's 1.6T transceivers are central to its growth strategy. These high-speed optical components enable datacenters to handle the exponential data demands of AI workloads. In Q1 2026, the Data Center and Communications segment grew 26% year-over-year, with 800G and 1.6T transceivers driving demand. The company has already initiated shipments of 1.6T Datacom transceivers, targeting hyperscale and AI datacenters.

A key differentiator is Coherent's vertically integrated manufacturing. By producing indium phosphide (InP) lasers in-house-via 6-inch production lines in Texas and Sweden-the company mitigates supply constraints and improves yield rates. This vertical integration creates a structural advantage over competitors reliant on external suppliers, who face higher costs and lower scalability.

Silicon Carbide Platform: Innovation Amid Pricing Pressures

Coherent's 300mm SiC platform represents a strategic pivot to address thermal management challenges in AI infrastructure. Larger wafers reduce per-chip costs, aligning with the industry's shift toward energy-efficient solutions. The global SiC market, valued at $10.29 billion in 2025, is projected to grow to $15.68 billion by 2032, driven by AI, electric vehicles, and renewable energy systems.

However, the SiC market is not without risks. Pricing pressures for 6-inch substrates have intensified, with wafer prices dropping below $500 due to oversupply. Coherent's 300mm platform could mitigate these pressures by improving cost efficiency, but the company must navigate near-term volatility. Additionally, rivals like Wolfspeed Inc. are advancing in SiC technologies, necessitating continuous R&D investment.

Competitive Positioning and Supply Chain Resilience

Coherent's global footprint-spanning 130 locations-enhances supply chain resilience amid geopolitical uncertainties and tariffs. Its recent divestiture of the Aerospace and Defense business has freed capital for high-margin photonics investments, further solidifying its focus on AI infrastructure.

The company's partnerships also bolster its competitive edge. A multiyear agreement with Apple, for instance, involves producing VCSELs for Face ID and other features, leveraging Coherent's advanced manufacturing in Sherman, Texas. This collaboration aligns with Apple's $600 billion commitment to U.S. innovation, creating a stable revenue stream for Coherent.

R&D and Capital Allocation: Fueling Long-Term Growth

Coherent's 2026 R&D investments are squarely focused on photonics and optical interconnects. The company is reinvesting in technologies like digital liquid crystal and optical circuit switches (OCS), which could expand its addressable market. CEO insights emphasize that the transition from electrical to optical interconnects is far from complete, with intra-rack optical solutions expected to gain traction in the coming years.

Capital expenditures are prioritizing production capacity expansion. Coherent is scaling six-inch InP wafer production and expanding module assembly in Malaysia and Vietnam to meet transceiver demand. These investments, while capital-intensive, position the company to capitalize on long-term AI infrastructure trends.

Conclusion: A Compelling Long-Term Thesis

Despite near-term pricing pressures in the SiC market and supply chain risks, Coherent's vertically integrated model, innovative product pipeline, and strategic partnerships create a robust foundation for sustained growth. Its 1.6T transceivers and 300mm SiC platform directly address the scalability and efficiency needs of AI datacenters, while its financial discipline ensures flexibility in a competitive landscape.

For investors, Coherent represents a high-conviction opportunity in the AI infrastructure boom. While execution risks exist-such as sustaining R&D momentum and managing SiC pricing volatility-the company's strategic alignment with industry tailwinds and its ability to innovate at scale justify a long-term investment thesis.