Hook / Thesis
Coherent (COHR) is one of the easiest - and messiest - ways to play the optical networking and photonics long call tied to the AI data-center build. The company reported a clean re-acceleration in its latest quarter (period ended 09/30/2025) with revenue of $1.581 billion and net income attributable to the parent of $226.3 million, a sharp step up from earlier quarters in the fiscal year. That uptick coincides with rising headlines around hyperscaler spending on 800G/1.6T optics and silicon photonics - the exact end market Coherent's Networking segment feeds.
Market action has already priced in optimism: the stock sits around $191.75 (last trade snapshot) after a multi-quarter run. That puts the shares at a lofty multiple versus recent earnings, but the combination of improving profitability, sizeable backlog commentary across the industry, and product-cycle catalysts argues for a tactical long. This is a trade idea - not a buy-and-forget. Enter on strength or a shallow dip, use a strict stop, and let catalysts (backlog updates, ECOC-type product news, and quarterly guide-ups) drive upside to defined targets.
What the business actually does - and why the market should care
Coherent is a vertically integrated manufacturer of engineered materials, optoelectronic components and devices, and lasers used across industrial, communications, electronics and instrumentation markets. It operates three segments - Networking (the largest revenue driver), Materials, and Lasers - and sells into hyperscalers, telecom carriers, and industrial customers.
Why it matters now: the AI training and inference stacks are massively bandwidth hungry. Hyperscalers are pushing 800G and 1.6T interconnects inside racks and across pods; that flows directly to demand for optical transceivers, silicon-photonic engines, and high-end optical components. Coherent is structurally exposed to that spending through its Networking segment and through higher-margin laser products used in precision manufacturing and test equipment.
Recent performance and the evidence
Use the numbers - they tell the story. The quarter ended 09/30/2025 (filed 11/05/2025) shows:
- Revenue: $1,581,378,000.
- Gross profit: $579,200,000 (implied gross margin ~36.6%).
- Operating income: $216,886,000 with operating expenses of $362,314,000 and R&D of $154,877,000.
- Net income attributable to parent: $226,349,000; diluted EPS $1.19 on diluted average shares of 190,684,000.
- Balance sheet: total assets $14.699B, equity $6.182B, long-term debt $3.308B, inventory $1.633B.
- Cash flow: operating cash flow was modest at $45.96M for the quarter, with net cash flow -$78.7M (driven by financing outflows of -$421.5M and investing inflows of +$296.8M).
Quarter-to-quarter the business shows a material improvement versus the soft patch earlier in the year. Compare to the quarter ended 03/31/2025 (filed 05/07/2025) where revenues were $1.498B and net income attributable to parent was just $15.7M. The latest quarter marks a meaningful recovery in both top-line and profitability, consistent with the optics cycle turning.
Valuation framing - approximate and pragmatic
The dataset does not provide a headline market cap, but we can approximate it using the last trade price and the company's diluted average shares from the most recent filing. Using diluted average shares of 190,684,000 and a price near $191.75, the implied market cap is roughly $36.6 billion (191.75 * 190.684M). That is a rough estimate and should be treated as such - shares outstanding will vary and intraday prices change.
Putting that in context: trailing-four-quarters net income (using the quarterly results shown across the most recent filings) is on the order of $370-380 million. That implies a trailing P/E in the high 80s-to-100s at the current price - a premium multiple. The premium is defensible only if the market expects several quarters of revenue and margin expansion driven by AI optical demand; if the optics cycle disappoints, the multiple looks vulnerable.
Qualitatively versus peers: the peers list in the data is noisy and includes non-comparables. In this space, valuation comparisons often include specialized optical/laser companies and larger semiconductor/component suppliers. Coherent's vertically integrated model, large inventory and temporary equity structure mean a straight multiple comp is imperfect - this is as much a product-cycle and backlog trade as it is a classic multiple re-rating.
Trade plan (actionable)
- Trade idea: Long COHR.
- Entry: 185-195. If you already own, add on a confirmed dip into 170-180 support. The stock is volatile; buying a tight range around 190 captures momentum while giving room for normal gyrations.
- Stop-loss: 155 (hard stop). That level sits below recent consolidation and would limit downside if momentum rolls over. Position size so that the stop equates to no more than 2-3% of portfolio risk per position, per your plan.
- Targets: Target 1 = 240 (near-term target reflecting multiple expansion if guidance and backlog prints in line). Target 2 = 320 (optimistic scenario: sustained ramp and margin expansion priced in). Scale out — sell 25-40% at Target 1, re-evaluate the rest at Target 2 or on fundamentals.
- Time horizon: 3-9 months (swing/position trade). This is a catalyst-driven trade - earnings, backlog commentary, and show-floor/product news will matter.
- Risk level: Medium-high due to valuation, working capital swings, and debt/preferred obligations.
Catalysts to watch
- Quarterly results and guidance (watch for 02/2026 quarter commentary and any guide-ups tied to hyperscaler orders).
- Product announcements and trade-show demos (e.g., ECOC / industry conferences - the company showcased next-gen optics on 09/28/2025).
- Backlog and shipments: explicit commentary from management on AI-related backlog and timing of shipments.
- Industry indicators: hyperscaler capital spending cadence, and third-party reports calling out 800G/1.6T demand (multiple news items in Dec 2025 - Jan 2026 highlight this trend).
Risks (at least four)
- Cyclical demand risk: Optical spending is lumpy and tied to hyperscaler capex. If AI spending stalls or gets delayed, revenue and margin upside could evaporate quickly.
- Valuation risk: The stock appears to price growth expectations already. A single modest miss in revenue or guidance could trigger a steep re-rate given the current implied P/E.
- Working capital & cash flow risk: Inventory is large (~$1.63B) and operating cash flow in the latest quarter was modest ($45.96M). That suggests earnings are not fully translating to free cash flow in the short run - watch receivables, inventory turns and cash conversion.
- Capital structure / temporary equity: The filings show material temporary equity and preferred-style adjustments (temporary equity attributable to parent $2.505B in the latest quarter and preferred-style adjustments ~ $33.48M in the quarter). That implies preferred dividends or other claims that can dilute or constrain returns to common shareholders.
- Leverage and interest expense: Long-term debt sits near $3.3B and historically interest expense has been meaningful (past quarters show ~$70-75M in interest expense). A rising rates environment or weaker EBITDA could stress coverage.
- Legal / reputational risk: There was a securities investigation notice reported on 09/17/2025 in the dataset. Such matters can pressure the stock and distract management.
Counterargument
A strong counterargument is valuation: the market appears to be paying for several quarters of robust revenue and margin expansion. If Coherent's conversion from order backlog to shipped product is slower than expected, or if competition forces pricing down, the business could revert to the mid-cycle levels we saw earlier in 2025. Given the inventory build and modest operating cash flow, there is a non-trivial path where earnings disappoint despite strong end-market headlines.
What would change my mind
I would materially lower my conviction if any of the following occur: a) management cuts guidance or reports materially weaker-than-expected shipments tied to AI optics, b) operating cash flow fails to convert as sales grow (working capital erosion), c) the temporary equity / preferred claim structure changes in a way that further dilutes common economics, or d) the securities investigation results in material penalties or executive turnover that undermines execution.
Conclusion
Coherent is a play on an AI-driven optical supercycle. The latest quarter (filed 11/05/2025) shows the business moving from the trough to materially improved profitability: revenues $1.581B, operating income $216.9M, net income attributable to parent $226.3M, and diluted EPS $1.19. The setup is attractive as a tactical, catalyst-driven long: enter in the 185-195 zone (or on a shallow dip to 170-180), use a hard stop at 155, and scale out at predefined targets of 240 and 320 while monitoring cash flow and backlog conversion.
This is not a low-volatility, low-multiple name. It is a cyclical-industrial growth trade with balance-sheet and capital-structure complexities. Position small to medium, size to your risk tolerance, and be disciplined on stops. If the AI optics cycle proves sustained and management can convert backlog into profitable shipments, Coherent has a clear path to justify much higher levels. If not, the premium multiple is at risk.
Disclosure: This is a trade idea for informational purposes only and not personal investment advice.