Coherent's Q2 Revenue Growth Reinforces AI Optics Narrative but Exposes Valuation and Execution Risks

What happened

Coherent reported record Q2 FY26 revenue of $1.69 billion, rising 7% sequentially and 17% year-over-year, driven primarily by 800G and 1.6T data center optics demand, which now accounts for over 70% of total revenue. The DeepValue master report, however, highlights that the stock's rally is underpinned by an unverified AI optics narrative, with public filings lacking auditable details on key catalysts like the NVIDIA partnership's shipment volumes or backlog. While non-GAAP gross margin expanded to 39% and operating margin reached 19.9%, supported by yield improvements and early benefits from six-inch indium phosphide manufacturing, the report notes that inventories have surged to $1.848 billion, straining cash conversion and signaling overbuild risk if demand slows. Moreover, the company's heavy reliance on Datacenter & Communications revenue exposes it to cyclical hyperscaler capex, with the report warning of downside if sequential growth stalls while inventories remain elevated. This news confirms near-term operational strength but does not resolve the critical gaps in visibility and cash flow needed to justify the current elevated valuation of $293.02 per share.

Implication

Coherent's strong Q2 performance validates its role in the AI datacenter optical supply chain, yet the lack of disclosed, binding details on the NVIDIA commitment means the growth trajectory remains speculative rather than proven. High inventories and declining operating cash flow—$104 million over six months—indicate capital intensity and potential liquidity strain, amplifying downside risk if hyperscaler demand pauses. With a P/E of 155 and EV/EBITDA of 44, the stock prices in sustained perfection, leaving minimal margin for error in a cyclical industry. The DeepValue report's 'WAIT' rating is reinforced, as investors should seek evidence of shipment conversion from inventory builds and improved cash generation before considering an entry. Therefore, monitoring upcoming quarterly results for sequential Datacenter & Communications growth and inventory trends is essential to avoid overpaying for unverified optimism.

Thesis delta

The new article does not materially shift the investment thesis, as it confirms near-term demand strength but fails to address the core uncertainties identified in the DeepValue report. Specifically, it provides no new information on auditable NVIDIA shipment schedules or backlog, and it does not alleviate concerns about high inventories and weak cash conversion. Thus, the thesis remains unchanged: a 'WAIT' rating is warranted until verifiable proof points emerge to justify the current valuation.