Hook / Thesis (quick read)
Coherent sits at the intersection of two hard trends: hyperscale AI buildouts and the need for higher-bandwidth optical interconnects. The firm's vertical capability in engineered materials and optoelectronics - notably six-inch indium phosphide wafer processing and module assembly - is an under-appreciated moat that can capture outsized revenue and margin expansion as cloud providers upgrade servers and top-of-rack fabrics for large language model training and inference.
The near-term trade: buy a tactical position in COHR on weakness with a clear stop. Management reported a beat on 02/04/2026 (Q2 FY2026) and showed strong top-line momentum — revenue of $1.6856B (+17.6% YoY vs Q2 FY2025) and diluted EPS of $0.76 — while continuing to invest in R&D (9.8% of revenue) to keep the InP roadmap ahead of competitors. That combination of demand and differentiated manufacturing gives the stock a favorable risk/reward for a disciplined long trade: entry 225–235, stop 195, target1 300, target2 375 (position sizing required).
What the company does and why the market should care
Coherent is a vertically integrated manufacturer of engineered materials, optoelectronic components and lasers. It operates across Networking, Materials and Lasers segments, with the Networking segment the largest revenue contributor. The strategic point investors should focus on is wafer-level capability in indium phosphide (InP) and module integration for high-speed optical transceivers. For AI data centers, transceivers that support 800G and above are in high demand and have structural barriers to scale - suppliers who control wafer supply, photonic integration and packaging earn higher margins and can protect bookings via capacity advantage.
Put simply: hyperscalers need more optical capacity and prefer suppliers that can guarantee yield and throughput at scale. Coherent's manufacturing footprint and engineering spend mean it can be that supplier.
Earnings and recent fundamental read-through
Key numbers from Q2 FY2026 (period ended 12/31/2025):
- Revenues: $1,685,629,000 (Q2 FY2026)
- Gross profit: $622,820,000 -> gross margin ~36.9%
- Operating income: $167,988,000 -> operating margin ~10.0%
- Net income: $143,814,000 -> net margin ~8.5%
- Diluted EPS (quarter): $0.76; management reported EPS beat on 02/04/2026 (actual $1.29 vs estimate $1.2318 for that earnings release as posted)
- R&D: $165,708,000 (~9.8% of revenue) — shows the company is continuing to invest in the product roadmap
The quarter contained both a revenue beat and an EPS beat (02/04/2026), which supports the thesis that demand from networking/data center customers is translating into bookings and realized margin. Quarter-over-quarter inventory rose to $1,847,907,000 vs $1,632,605,000 in the prior quarter — a sensible flag (see Risks) but also consistent with building finished goods/wafer inventory ahead of large order fulfilments.
Balance sheet and cash flow snapshot
- Total assets: $15.0877B; equity attributable to parent: $8.5393B.
- Long-term debt: $3.3519B (material leverage; interest costs have been a recurring line item in prior quarters ~ $70–75M per quarter).
- Net cash from operating activities for the quarter: $57,900,000; investing: -$138,531,000; financing: +$43,058,000 for Q2 FY2026.
Two balance-sheet takeaways: (1) the company is profitable and generating operating cash flow, but (2) leverage is meaningful, and working capital (inventory) is large relative to a single quarter's revenue. That combination elevates the importance of order visibility and margins staying intact.
Valuation framing
The stock is trading near $229 intraday (last trade ~ $229 on 02/10/2026), down from a recent intraday high in the $240s but well up from the ~ $90 range twelve months ago. A simple P/E look is noisy because share counts, temporary equity items and quarter-by-quarter EPS swing materially. Using the most recent four reported diluted EPS figures (Q2 FY2026 0.76, Q1 FY2026 1.19, Q3 FY2025 -0.11, Q2 FY2025 0.44), the trailing twelve-month diluted EPS aggregates to roughly $2.28. That implies a headline P/E near 100x at $229 — expensive on a pure trailing EPS multiple.
However, valuation should be considered in context:
- Multiple expansion is being priced on structural AI optics growth and market share capture — if Coherent converts backlog into higher-margin networking revenue, the multiple could compress to levels more comparable to semiconductor-material and optical-component peers.
- Reported profitability (gross margin ~37% in Q2) is healthy for the business model and suggests the company can sustain operating leverage as revenue scales.
Market cap was not provided in the filing extract available — that missing datapoint makes an exact EV/EBIT or net-debt adjusted multiple calculation impossible here. The sensible conclusion: valuation is full on headline EPS; this trade is therefore tactical and depends on revenue and margin execution rather than a valuation multiple grind lower.
Trade plan (actionable)
- Trade direction: Long.
- Entry: 225–235 (scale in over the range; current prints around $229).
- Initial stop: 195 — a hard stop ~14–15% below entry zone, below recent short-term technical support and a level that would imply a tangible change in risk/reward.
- Target 1 (near-term, 3–6 months): $300 — assumes continued order momentum, margin hold, and multiple expansion as AI optics revenues re-rate higher.
- Target 2 (medium-term, 9–18 months): $375 — if Coherent demonstrates sustained 20%+ year-over-year growth and margin expansion from mix shift into high-end networking products.
Position sizing: keep the trade to a size where the stop loss equals a manageable portfolio percentage (e.g., 1–2% of portfolio). The trade is not a buy-and-forget; it needs active monitoring of bookings, inventory and cash flow.
Catalysts to watch (2–5)
- Quarterly order/backlog updates that show increasing networking bookings or multi-quarter commitments from hyperscalers.
- Margin expansion tied to higher mix of InP-based modules and better wafer yields.
- Announcements of design wins for 800G/1.6T modules with hyperscalers or major cloud providers.
- Any accelerated share-buyback program or capital structure simplification that reduces temporary equity or addressable dilution.
Risks and counterarguments
Bottom line: the AI optics story is compelling, but the path is not without real execution and financial risks. Below I list major risks and one counterargument to the long thesis.
- Inventory and working-capital risk - Inventory rose to $1.848B in Q2 FY2026 from $1.633B in the prior quarter. If demand softens, excess inventory could pressure margins and cash. The company is building inventory ahead of customer demand, which is constructive if orders convert but destructive if they do not.
- Leverage and interest expense - Long-term debt stands at $3.352B. Quarterly interest expense has been sizable in prior periods (~$70–75M quarter). Higher rates or a drop in operating cash flow would stress the ability to service debt and could force equity issuance or cutbacks in capex/R&D.
- Valuation sensitivity - On a trailing twelve-month EPS basis the stock currently implies a very high P/E (~100x using reported quarterly EPS sums). That makes the share price vulnerable to disappointment even if fundamentals remain positive.
- Temporary equity / complex capital structure - The balance sheet shows substantial temporary equity items (several quarters list temporary equity attributable to parent in the billions). That suggests there are non-standard equity claims or convertibles that could affect diluted shares and effective equity value for common holders.
- Supply-chain and wafer-capacity competition - InP wafer supply and yield improvement are hard engineering problems; competitors with faster scale or alternative silicon photonics approaches could take share if Coherent stumbles on yield or cost.
- Counterargument - The bear case is straightforward: the market is pricing Coherent as a beneficiary of AI optics growth already; if revenue growth slows or gross margins compress even modestly, the multiple could collapse and lead to a deep drawdown. Given the high P/E today, disappointment risk is elevated. In that view, a more conservative approach is to wait for multiple quarters of repeatable revenue beat-and-raise before committing size.
What would change my mind
I would materially change the bullish stance if any of the following occur:
- Order cancellations or material slowdown reported in the Networking segment across consecutive quarters.
- Sustained margin compression below 30% gross margin or operating margin falling meaningfully from the current ~10% level while revenue growth stalls.
- Large dilutive equity issuance or conversion of temporary equity that meaningfully increases the share count and pushes EPS down despite stable operating profits.
- Net cash flow from operations turns negative while capex and inventory remain elevated, indicating demand miss or failed build-to-order strategy.
Conclusion
Coherent represents a tactical long with a clear thesis: its vertical InP wafer and module capability is a defensible moat for hyperscaler AI networking demand. Q2 FY2026 results (02/04/2026) showed revenue of $1.6856B (+17.6% YoY), gross margin near 37% and an EPS beat — the fundamentals are aligning with the narrative. That said, the shares trade at a premium to trailing EPS, leverage and inventory are real constraints, and temporary equity complexity clouds dilution risk.
For traders comfortable with earnings and execution risk: enter in the $225–235 range, use a stop at $195, and look for $300/$375 as step-up targets if demand and margins continue to print ahead of expectations. For more conservative investors, wait for several quarters of repeatable revenue/margin expansion or for valuation to reset. Monitor orders, inventory conversion, and any capital-structure moves closely.
Trade idea summary: Long COHR. Entry 225–235. Stop 195. Target1 300, Target2 375. Risk: elevated — size position accordingly.