Coherent Corp. Poised for Growth Driven by AI Datacenter Demand

Coherent Corp. (NYSE: COHR) has garnered a "buy" rating from analysts, positioning the company for significant growth as it capitalizes on the accelerating build-out of artificial intelligence (AI) datacenters and robust performance within its Communications segment. The company's strategic focus on high-speed optical hardware, coupled with key business developments, is driving optimistic outlooks for its financial trajectory.

The Event in Detail: Strategic Realignment and Product Innovation

Coherent Corp. is a pivotal provider of engineered materials, lasers, transceivers, and optoelectronic systems, catering to diverse markets including communications, industrial, electronics, and instrumentation. A primary driver of the recent "buy" rating is the company's direct benefit from the structural expansion of AI datacenters. Coherent supplies the critical optical hardware, often described as the "nervous system," that facilitates the immense data processing required by AI and machine learning applications.

The company's product portfolio includes essential components such as 800G and emerging 1.6T transceivers, which enable ultra-fast, low-latency connections within AI infrastructures. Initial shipments of 1.6T transceivers are underway, alongside early revenue bookings from its Optical Circuit Switch (OCS) platform, signaling strong momentum. Starting fiscal year 2026, Coherent will report under two new segments: Data Center and Communications, and Industrial, reflecting its strategic emphasis.

Beyond AI, Coherent has diversified its growth drivers. A multi-year agreement to supply Apple with next-generation Vertical-Cavity Surface-Emitting Lasers (VCSELs) for iPhones and iPads, expected to contribute financially from the second half of fiscal year 2026, validates Coherent's high-volume manufacturing capabilities and technological leadership. Furthermore, the company completed the strategic sale of its Aerospace & Defense business for $400 million, a move designed to optimize its portfolio, reduce debt by $437 million in FY25, and enhance overall profitability by shedding a lower-margin operation.

Analysis of Market Reaction: Structural Demand and Financial Strength

Investor optimism surrounding Coherent Corp. is largely attributed to the perception that the demand for AI datacenter infrastructure represents a structural, rather than cyclical, growth phase. The insatiable need for network bandwidth to process vast datasets across thousands of interconnected processors in AI and machine learning applications underpins this sustained demand.

Coherent's Communications segment has already demonstrated significant traction, with revenue surging in fiscal year 2025. This strong performance is anticipated to continue, supported by the ongoing ramp-up of 1.6T transceivers and increasing OCS platform revenue. The Apple supply deal further reinforces confidence in Coherent's technological prowess and ability to secure long-term, high-volume contracts with leading technology firms. The divestiture of the Aerospace & Defense unit is expected to immediately boost earnings per share (EPS) by allowing for better capital allocation and debt reduction.

Financially, Coherent reported a robust fiscal year 2025, achieving $5.81 billion in revenue, marking a 23% year-over-year increase. Non-GAAP EPS expanded significantly by 191% to $3.53. The company's focus on core growth markets and its disciplined approach to capital management appear to be yielding tangible results.

Broader Context & Implications: A Decade of Digital Transformation

The explosive growth in demand for high-speed optical transceivers underscores a broader digital transformation. The market for 800G and 1.6T optical transceivers, crucial for next-generation datacenters and telecommunication networks, is projected to expand dramatically from an estimated $2 billion in 2023 to $10 billion by 2027, representing a compound annual growth rate (CAGR) exceeding 50%. This illustrates the foundational role Coherent's products play in supporting the technological advancements driving AI.

Coherent's OCS platform alone is projected to expand its addressable datacenter market by over $2 billion by 2030. The company's current valuation, approximately 22 times forward earnings, is considered reasonable by analysts, who identify a credible path to ~$151 per share, with potential for additional upside from estimate revisions.

Expert Commentary: Upside Potential in Underestimated Growth

Analysts note that consensus estimates for the networking segment's future growth may be conservative, particularly given the early stages of the AI datacenter build-out cycle. Recent networking revenue growth exceeding 60% further suggests potential for upward revisions to these estimates.

"This is not your typical cyclical recovery story but actually a structural demand cycle that I expect to last for the foreseeable future," commented one analyst, emphasizing the enduring nature of the current market opportunity for companies like Coherent.

Despite inherent risks associated with AI demand cycles, the stock is seen to offer an attractive risk-reward profile, with current valuations potentially not fully reflecting the company's long-term growth prospects.

Looking Ahead: Sustained Momentum and Strategic Execution

The trajectory for Coherent Corp. in the coming periods will be influenced by several key factors. Investors will closely monitor the continued ramp-up of 1.6T transceiver shipments and the acceleration of OCS platform revenue. The financial contributions from the Apple VCSEL supply agreement, commencing in the latter half of fiscal year 2026, will also be a significant indicator.

Further benefits from the streamlined operations post-divestiture, including reduced interest expenses due to debt reduction, are expected to provide a sustained boost to EPS. Coherent's outlook anticipates robust financial performance, targeting $7.2 billion in revenue and $655.3 million in earnings by 2028, underscoring management's confidence in the company's strategic direction and market position. Potential upward revisions to consensus estimates, driven by stronger-than-expected structural AI demand, remain a critical upside catalyst for COHR in the foreseeable future.