Coherent Posts Accelerating Datacenter Growth, but Dilution and Valuation Keep Caution

What happened

Coherent's fiscal Q4 2026 results showed revenue up 34% y/y and data center revenue up 66% y/y, confirming strong AI-driven demand. This comes after a share price drop of more than 50% from recent highs, which the article frames as a contrarian buying opportunity. The company's $2 billion equity raise from Nvidia caused 26.2% dilution, strengthening the balance sheet but reducing per-share earnings power. The DeepValue report had already flagged valuation concerns at $333 with a P/E of 145.6 and no margin of safety, and the subsequent price decline may moderate but not eliminate that overvaluation. Inventory buildup remains intentional to support anticipated growth, but nine-month operating cash flow was near zero due to working capital absorption, a key risk to monitor.

Implication

Investors should acknowledge that Coherent's accelerating data center revenue is a tangible sign that its Indium Phosphide capacity expansion is converting demand into shipments. However, the 26.2% dilution from the Nvidia investment reduces existing shareholders' claim on future earnings, offsetting part of the fundamental improvement. The intentional inventory buildup, while supporting future revenue, still needs to demonstrate conversion into operating cash flow; nine-month cash flow was negligible due to inventory and capex spending. Even after the >50% price drop, the stock likely still trades above the DeepValue report's attractive entry level of $285, implying limited margin of safety relative to its base-case value of $340. Therefore, we recommend waiting for at least two more quarterly reports to confirm sustained gross margin above 39.6% and a stabilization or decline in inventory growth before adding positions, while monitoring hyperscaler capex commentary for any signs of deployment delays.

Thesis delta

The original DeepValue thesis rated COHR a WAIT due to high valuation and unproven cash conversion despite a strong manufacturing moat in Indium Phosphide. The new Q4 data shows even stronger revenue acceleration, particularly in data center, which improves the fundamental trajectory. However, the significant equity dilution and ongoing cash flow weakness raise the bar for per-share value creation, so the rating remains WAIT but with higher conviction in the demand story and continued concern about shareholder value realization.