Coherent's Quantum Leap: Capitalizing on the AI Boom

Formerly known as II-VI Incorporated, Coherent Corp. (COHR) has established itself as a critical supplier of materials, photonics, and laser technologies to a wide array of target markets. This company emerged from the merger of two leading laser industry giants and has since forged strong partnerships to extend its market reach and diversify its product offerings.

Substantial investments in research and development (R&D) and a laser-sharp focus on artificial intelligence (AI) products drive the company’s growth strategy. With a diverse portfolio ranging from engineered materials to optoelectronic components, COHR is setting its sights on dominating lucrative markets such as semiconductor manufacturing equipment and life sciences.

The laser maker's shares have doubled in recent months, benefiting from the burgeoning demand for AI and a boost in investor confidence following significant leadership changes. On June 3, the stock jumped more than 22% after Jim Anderson, who took over from the retiring Vincent Mattera Jr., was named the new CEO.

Anderson’s impressive stint at Lattice Semiconductor Corporation (LSCC), where he drove remarkable revenue and earnings growth, has investors dreaming big. They’re betting his leadership could propel Coherent to new heights, especially with AI's potential. Moreover, COHR’s stock has gained nearly 70% year-to-date and more than 130% over the past nine months.

In addition to leadership changes, Coherent has unveiled innovative products. On May 30, 2024, the company introduced a new laser power sensor, the PM10K+, designed to accelerate power output measurements by up to 500%. This new sensor is tailored for high-power applications, a growing sector in the industry.

Further, COHR launched a new single-mode, polarization-maintaining optical fiber. This product, the first of its kind in the market, is designed to support high-power 1550 nm amplifiers with over 20 watts of average power. Such developments highlight Coherent Corp's ongoing commitment to innovation, addressing market needs, and positioning itself as a leader in pushing the boundaries of laser technology capabilities.

How Did COHR Perform Financially and What Lies Ahead?

In the third quarter ended March 31, 2024, COHR posted revenue of $1.21 billion, exceeding the Wall Street estimates of $1.17 billion by 3.5%. Within its Networking segment, revenue amounted to $619 million, reflecting an 18% increase sequentially and a 12% rise year-over-year. This growth was driven by a significant, nearly 80% sequential rise in AI-related 800G Datacom transceiver revenue, which reached around $200 million.

Further, COHR saw an 11% increase in orders year-over-year, boosting its backlog to over $2.74 billion (up over $100 million from the previous year). The company’s non-GAAP operating income and attributable net earnings amounted to $182.20 million and $113.20 million, registering sequential growth of 6.2% and 31%, respectively.

Also, the company’s third-quarter non-GAAP EPS came in at $0.53, above the high end of its guidance. Moreover, Coherent surpassed the consensus EPS estimate of $0.42 by 27.3%.

Looking ahead, COHR anticipates sequential revenue growth in the remaining quarters of fiscal 2024, driven by solid demand in AI and other favorable end-markets. In addition, management lifted the lower end of its revenue outlook for the fiscal year 2024 by $70 million. It expects full-year revenue from $4.62 to $4.70 billion. Also, Coherent raised the non-GAAP EPS guidance to $1.56 to 1.73, a moderate increase from the previously guided $1.30 to $1.70.

Furthermore, Analysts expect COHR’s revenue for the fourth quarter (ending June 2024) to increase 5.8% year-over-year to $1.28 billion. The company is estimated to post an earnings per share of $0.60 in the current quarter, indicating a 46.5% improvement from the prior year’s period.

Is Coherent Poised to Capitalize on the AI Boom?

COHR is strategically well-positioned to capitalize on the burgeoning demand for AI-related technologies, mainly through its robust datacom portfolio enhancements. Analysts from JPMorgan highlighted Coherent among the companies poised to benefit from the expanding AI market.

Leveraging its specialized transceivers designed for AI and machine learning applications, which support key protocols like Ethernet and NVIDIA's NVLink, Coherent is reinforcing its commitment to innovation at the intersection of networking, lasers, and advanced materials.

Beyond its core strengths, the company is seeing significant momentum across its AI/ML portfolio. Revenue from 800G transceivers surged nearly 80% sequentially, nearing the $200 million mark in the last reported quarter. Looking forward, Coherent is gearing up for the commercial launch of 1.6T transceivers later this calendar year, anticipating continued strong demand driven by advancements in AI technology.

Meanwhile, management is optimistic about the future and anticipates that 50% of Datacom transceiver revenue for fiscal 2024 will be driven by AI-related revenue. It expects this robust demand environment to persist into the next fiscal year and beyond.

Given the expectations of continued market strength and a projected 21% CAGR in the Datacom transceiver market until 2028, Coherent remains well-positioned to capitalize on the accelerating demand for AI-driven technologies and data center expansions.

Bottom Line

As Coherent continues to navigate the AI boom, its ability to stay ahead of market trends and technological advancements will be crucial. With new leadership and a strong foundation in R&D, Coherent is well-positioned to maintain its momentum and achieve sustained growth in the competitive tech industry.

Meanwhile, the global AI in hardware market is poised to grow from $23.50 billion in 2023 to $84.90 billion by 2031, growing at a CAGR of 15.5%. COHR is expected to benefit significantly from the booming AI market due to its expertise in laser and photonics technologies, which are integral to AI hardware development and applications.

While the recent surge in COHR’s stock price following the announcement of the new CEO has brought it close to bullish expectations, this optimism warrants caution until more evidence of financial performance aligns with these high expectations. Hence, investors should stay vigilant and track the company’s progress in its key markets and ability to deliver on its growth promises.