Coherent's AI Optics Narrative Persists, But Execution and Valuation Remain Critical

What happened

A Seeking Alpha article reiterates the bullish case for Coherent, highlighting vertical integration, 6-inch wafer ramp, and divestitures as drivers for margin expansion and revenue acceleration in AI data center optics post-2026. However, the DeepValue master report provides a cautious counterpoint, noting that COHR is already priced as an AI winner at $211 with elevated valuations (EV/EBITDA 32.4, P/E 131) and high execution risk. The investment thesis hinges on converting record bookings into shipped revenue, which requires unlocking InP laser capacity and sustaining double-digit sequential datacenter growth in the March and June 2026 quarters. Key risks include InP wafer yields, fab ramp bottlenecks, packaging constraints, and a crowded AI optics trade that could trigger sharp declines if growth falters. Investors must look beyond the optimistic narrative to assess whether Coherent can deliver on these operational milestones amidst near-term FCF headwinds and lower margins compared to peers like Lumentum.

Implication

With COHR trading at rich multiples, forward returns depend entirely on successful capacity expansion and sustained growth, not just demand headlines, making the stock vulnerable to disappointment. The high net debt ($3.0B) and interest coverage (2.01) add financial risk, necessitating close monitoring of cash flow and debt reduction efforts despite recent paydowns. Near-term, the stock is sensitive to quarterly guidance misses, as historical volatility shows, with execution risks around InP scaling and assembly bottlenecks posing immediate threats. Long-term, if Coherent executes flawlessly, it could capture significant AI optics value, but the absence of a margin of safety at current prices limits upside without clear milestones. Therefore, a prudent strategy is to wait for a pullback to the attractive entry point of $175 or for verifiable evidence of double-digit sequential growth and InP capacity doubling in the coming quarters.

Thesis delta

The Seeking Alpha article does not materially shift the investment thesis; it reinforces the optimistic narrative but lacks new data points to alter the cautious stance. The core thesis remains unchanged: COHR must prove its ability to convert bookings into revenue through successful InP capacity scaling and double-digit sequential growth in March and June 2026. No adjustment is warranted until these quarters provide concrete evidence of execution, maintaining the 'WAIT' rating.