Coherent Q2 Earnings Demonstrate Growth, but Valuation and Execution Risks Remain Elevated

What happened

Coherent Corp. reported strong Q2 FY26 results, with revenue increasing 17.5% and EPS up 35.8% year-over-year, driven by datacenter and communications segments that now represent 72% of sales. The DeepValue report notes that Q2 datacenter revenue grew 14% sequentially, with a book-to-bill ratio exceeding 4x, indicating robust order momentum amidst AI-driven demand. However, the report emphasizes that COHR's stock, priced at $211, already reflects an AI optics upcycle, with high valuation multiples (P/E 131, EV/EBITDA 32.4) and no margin of safety. Critical execution hurdles include sustaining double-digit sequential datacenter growth through the March and June 2026 quarters while scaling indium phosphide (InP) laser capacity to convert backlog into shipments. Despite the positive earnings headline, the investment thesis remains contingent on overcoming these supply constraints and avoiding share loss in a crowded market.

Implication

The Q2 results validate COHR's exposure to AI optics demand but do not mitigate the high valuation and execution risks highlighted in the DeepValue report. Forward returns depend on converting record bookings into sustained shipment growth, necessitating double-digit sequential datacenter expansion in the March and June 2026 quarters. Capacity scaling, particularly for InP lasers, must proceed on schedule to unlock backlog and support margin improvement, or growth could stall. Any miss in these targets could trigger a sharp multiple reset, given the stock's crowded AI trade narrative and financial leverage (net debt/EBITDA 2.7). Therefore, while the earnings are encouraging, investors should adhere to the 'WAIT' rating and consider entry only near $175 or after clear evidence of execution success.

Thesis delta

The news confirms the demand strength underlying COHR's AI optics thesis but does not alter the critical need for execution on shipment conversion and capacity scaling. No shift in the investment call is warranted; the thesis remains unchanged, with a 'WAIT' rating until the March and June quarters demonstrate sustained double-digit sequential growth and InP ramp progress.