Coherent Hits High End of Q4 Guidance as Datacenter Mix Reaches 79%

What happened

Coherent reported fiscal Q4 revenue of $2.05 billion, matching the top end of its guidance range, with Datacenter & Communications accounting for 79% of sales, up from 75% in Q3. The continued surge in AI-driven optical demand more than offset weakness in the Industrial segment, which remains depressed due to divestitures and soft end markets. This result confirms that Coherent's capacity expansion is converting backlog into revenue, but the company has not yet disclosed whether gross margin landed within the guided 39%-41% band or whether working capital improved. The stock's valuation remains extremely demanding at over 145x trailing earnings, so a single quarter of revenue upside does not resolve the key question of free cash flow generation. Investors should await the full earnings release and call for details on margin, inventory, and the 6-inch InP ramp before reassessing the risk-reward.

Implication

Over the next six months, Coherent must prove that high datacenter revenue translates into sustained gross margin at or above 40% and that inventories stop growing faster than sales; otherwise, the stock may be vulnerable to a derating given its premium valuation. Positively, strong demand and a higher datacenter mix support the long-term growth narrative, but investors should demand evidence of operating leverage and free cash flow before paying up further.

Thesis delta

The thesis remains unchanged: Coherent possesses a real manufacturing edge in indium phosphide, but the stock is priced for flawless execution. The Q4 revenue number confirms demand strength, but the thesis hinges on margin durability and cash generation, which are still unproven. No change to the WAIT rating; the next catalyst is the detailed earnings release and commentary on 6-inch output and inventory trends.