Coherent Stock Slips on In-Line Q3; AI Optics Thesis Unchanged

What happened

Coherent reported strong Q3 FY2026 results with revenue of $1.806B (+20.5% Y/Y), beating estimates, and non-GAAP gross margin of 39.6%, within guidance range. Datacenter & Communications revenue surged 41% Y/Y to $1.362B, driven by AI datacenter demand. Despite the beat, shares fell 2.7% as the market digested in-line earnings and waited for further margin proof. The stock remains near $345, reflecting a crowded AI optics narrative supported by NVIDIA's $2B investment and S&P 500 inclusion. Cash conversion remained weak with inventories consuming $699M in the first nine months.

Implication

The next critical checkpoint is Q4 FY2026 results (guide: $1.91B–$2.05B revenue, 39%–41% non-GAAP gross margin). If margins expand and InP capacity ramps on schedule, the stock can re-rate; otherwise, digestion risks and working-capital drag may trigger a correction. Maintain WAIT bias with attractive entry at $260.

Thesis delta

No material shift in thesis. The Q3 print aligned with expectations, reinforcing both the bullish AI datacenter demand driver and the margin/cash-conversion execution risks flagged in the master report. The stock's reaction confirms that proof of margin expansion, not just revenue growth, is needed to sustain the premium.