CHIPS Act Funding Provides Modest De-Risking for Coherent's InP Expansion, But Thesis Still Hinges on Demand Conversion

What happened

Coherent has signed a letter of intent for up to $50 million in CHIPS Act funding to expand its 6-inch Indium Phosphide manufacturing facility in Sherman, Texas, supporting AI datacenter optical networking demand and its partnership with NVIDIA. While the funding modestly reduces the company's capital intensity and signals government validation, the DeepValue report maintains a WAIT rating with conviction 3/5, as the stock at $377.6 (EV/EBITDA 55.8) already prices in sustained AI optics growth. The critical test remains whether Coherent can double InP capacity next quarter while inventory growth moderates and free cash flow improves, with the next quarter's results providing the key proof point. The CHIPS Act LOI is a positive but incremental development that does not alter the fundamental need for demand to convert into cash flow.

Implication

The $50 million CHIPS Act LOI provides a small capital efficiency boost, but the thesis still depends on Datacenter & Communications revenue sustaining >25% Y/Y growth and inventory flattening. Maintain a WAIT stance with attractive entry near $320; monitor August 2026 earnings for evidence of InP capacity doubling and working capital trends.

Thesis delta

The CHIPS Act LOI modestly de-risks Coherent's InP capacity expansion by providing $50M in direct funding, reducing the company's cash outlay. However, this does not change the core thesis that the stock is fully priced and requires proof of demand conversion and cash generation. The funding is a tailwind but not a game-changer; the primary risk remains the ability to ramp InP capacity on schedule and convert high inventories into cash without margin compression.