Coherent Q4 beats top of guidance; margins expand, but valuation remains stretched

What happened

Coherent reported Q4 FY2026 revenue of $2.05B, up 34% Y/Y and 42% pro forma, hitting the top of prior guidance. Non-GAAP gross margin expanded 215 bps Y/Y to 40.2%, while GAAP margin rose 277 bps to 38.5%, indicating continued operating leverage from datacenter demand. GAAP EPS swung to $1.19 from a loss a year ago, and non-GAAP EPS grew 74% to $1.74, reflecting both higher sales and margin improvement. However, the press release lacks details on segment performance, inventory levels, and cash flow, which were key risk factors in the prior analysis. The results align with management's prior claims that 6-inch indium phosphide capacity is converting demand into shipments, but the stock's high valuation still assumes flawless execution into FY27.

Implication

The top-line beat and margin expansion confirm that Coherent's AI networking demand is real and that 6-inch capacity is starting to contribute, but the press release omits the working-capital details that were critical red flags in the prior report. Investors should not extrapolate the headline revenue beat without seeing whether inventories grew slower than Datacenter revenue, as the company's nine-month operating cash flow was only $10.1M due to inventory and receivable build. The stock still trades at roughly 145x trailing earnings and 49x EV/EBITDA, implying that the market has already priced in sustained hypergrowth and continued margin gains. A prudent approach is to wait for the full 10-K (or 10-Q with detailed balance sheet) before adding, or trim positions above $390 as previously advised. If the next quarterly filing shows inventories stabilizing relative to datacenter growth and operating cash flow improving, the thesis would strengthen enough to justify a higher conviction rating.

Thesis delta

The thesis is largely unchanged: Coherent's manufacturing edge in indium phosphide is being validated by strong revenue growth and margin expansion, but valuation remains a barrier. Q4 results confirm execution on the top line and gross margin, but the missing inventory and cash flow data prevents an upgrade to conviction. The next checkpoint is whether working capital normalizes, which would support a more constructive stance; until then, the WAIT rating with a trim above $390 and attractive entry near $285 remains appropriate.