Coherent's AI Optics Narrative Confronts Execution and Valuation Realities

What happened

A Seeking Alpha article positions Coherent as a critical beneficiary of AI datacenter demand, emphasizing vertical integration in indium phosphide lasers for cost advantages during the shift to 1.6T transceivers. However, DeepValue's report reveals that COHR's stock, at $211, already prices in strong AI optics expectations with elevated valuation multiples (P/E 131, EV/EBITDA 32.4), leaving minimal margin of safety. The investment thesis centers on shipment conversion, not demand headlines, requiring proof of double-digit sequential datacenter growth in the March and June 2026 quarters. Execution risks are heightened by capacity constraints, with InP laser supply and assembly expansion needing to unlock backlog without delays. Overall, while the article touts structural benefits, the reality is that COHR must navigate high leverage and competitive threats to justify its current price.

Implication

The high valuation demands flawless execution, with COHR needing to sustain double-digit sequential datacenter growth through mid-2026 to avoid a multiple reset. Near-term focus must be on the March and June quarter results, which serve as critical checkpoints for growth trajectory and InP capacity progress. Capacity expansion milestones, such as doubling internal InP production by Q4 CY2026, are essential to convert bookings into revenue and mitigate supply bottlenecks. Competitive pressures from NVIDIA's co-packaged optics push could shift value pools, threatening COHR's pluggable-centric model if not adapted. Additionally, balance sheet leverage (net debt to EBITDA 2.7) underscores the need for continued debt reduction and cash flow generation to enhance financial resilience.

Thesis delta

The new article reinforces the bullish AI optics narrative but does not materially shift the investment thesis. The core thesis remains unchanged: COHR must demonstrate shipment conversion and margin resilience over the next two quarters, with execution risks outweighing demand optimism. No delta is indicated; instead, the article highlights the need for investors to look beyond promotional rhetoric to underlying operational challenges.