Why Coherent Stock Crashed Despite Beating Earnings Estimates: Assessing the Long-Term Implications of Slowing Data Center Growth and Strategic Divestitures on Valuation and Investment Appeal

In the world of high-growth tech stocks, Coherent Inc. (NYSE: COHR) has long been a poster child for innovation in photonics and laser technology. Yet, in August 2025, the stock plummeted nearly 20% after a Q2 earnings report that, on paper, was a resounding success. Revenue hit $1.53 billion, a 16.4% year-over-year increase, and adjusted EPS of $1.00 beat estimates by 8.7%. So why did the market punish Coherent? The answer lies in the interplay of slowing data center growth, strategic divestitures, and the market's fixation on future expectations over current performance.

The Earnings Beat That Wasn't Enough

Coherent's Q2 results were undeniably strong. The company's data center segment, a key driver of growth, saw 24% revenue growth—a solid number in isolation but a stark slowdown compared to previous quarters' 39%, 46%, and 58% growth rates. While the AI datacenter boom has been a tailwind for photonics firms, the deceleration signaled to investors that the sector might be approaching a plateau.

The stock's collapse, however, was triggered by the company's third-quarter guidance. Coherent projected revenue of $1.53 billion, below the $1.54 billion Wall Street expected. This 0.6% shortfall may seem trivial, but in a sector where growth is the lifeblood of valuations, even minor deviations can spark panic. Analysts like Vivek Arya of Bank of America downgraded the stock to “neutral,” citing concerns that the data center slowdown could persist and erode Coherent's margins.

Strategic Divestitures: A Double-Edged Sword

To understand Coherent's long-term prospects, one must examine its recent $400 million sale of the Aerospace and Defense business to Advent. This move, framed as a strategic pivot to focus on high-margin markets like AI datacenters and industrial photonics, has immediate financial benefits. The proceeds will reduce debt, improve EPS, and free up capital for R&D and capital expenditures.

However, the divestiture also removes a stable revenue stream. The Aerospace and Defense segment contributed roughly $50 million in quarterly revenue, and its post-sale exclusion will reduce Coherent's top-line growth by $20 million annually. While this aligns with the company's focus on higher-growth areas, it introduces near-term volatility. Investors are now forced to weigh whether the trade-off is worth it: sacrificing steady cash flow for the promise of faster, albeit riskier, growth in AI infrastructure.

The Data Center Slowdown: A Harbinger of Sector Maturity?

The deceleration in data center growth raises a critical question: Is Coherent's slowdown a symptom of a maturing market? The AI datacenter boom has been a gold rush for photonics firms, but as major cloud providers and hyperscalers scale their infrastructure, the pace of adoption may naturally slow. Coherent's 24% growth in Q2, while still impressive, suggests that the “easy wins” of the early stages of the AI revolution are behind it.

Moreover, the market is now scrutinizing Coherent's ability to maintain its margin expansion. The company's non-GAAP gross margin hit 37.9% in FY2025, up 358 basis points year-over-year. But with the divestiture of the Aerospace and Defense business and the expected contraction in data center growth, maintaining these margins will require operational discipline and innovation. Coherent's recent product launches—such as 1.6T transceivers and diamond silicon carbide cooling technology—offer hope, but execution risks remain.

Investor Sentiment: A Mixed Bag

Corporate insiders have added to the uncertainty. Increased insider selling in Q3 2025 suggests a cautious outlook, even as the company's balance sheet strengthens. Meanwhile, analysts remain split. William Blair's Jed Dorsheimer and Bank of America's Vivek Arya have both downgraded the stock to “Hold,” arguing that Coherent's valuation is fairly priced but lacks the upside potential of its peak growth phase.

The stock's 23% year-to-date gain outperformed the S&P 500's 9.6% but has been marred by a 15% pullback in early 2025. This volatility reflects the market's tug-of-war between optimism over Coherent's strategic clarity and skepticism about its ability to sustain growth.

The Road Ahead: A Calculated Bet

For long-term investors, Coherent's story is a mix of promise and peril. The company's strategic divestitures and focus on AI infrastructure position it to benefit from the next phase of the photonics revolution. However, the slowing data center growth and near-term revenue headwinds mean that patience is required.

Investment Advice:
1. Buy for the Long Haul: Coherent's technical leadership in photonics and its strategic pivot to high-growth markets make it a compelling long-term play. Investors with a 3–5 year horizon should consider buying dips, especially if the stock corrects further on margin concerns.
2. Monitor Execution: Closely track the company's ability to scale its 1.6T transceivers and optical circuit switches. These products could redefine Coherent's revenue trajectory.
3. Watch the Balance Sheet: The debt reduction from the Aerospace and Defense sale is a positive, but ensure that the company maintains its R&D spending to stay ahead of competitors.
4. Avoid Short-Term Bets: The stock's volatility and mixed analyst sentiment make it unsuitable for traders. Stick to a buy-and-hold strategy unless there's a clear catalyst for near-term growth.

In conclusion, Coherent's stock crash was less about the earnings beat and more about the market's forward-looking concerns. While the slowdown in data center growth and strategic divestitures introduce near-term risks, the company's long-term potential in AI infrastructure and industrial photonics remains intact. For investors willing to navigate the volatility, Coherent offers a unique opportunity to ride the next wave of technological innovation.