Coherent Sees Strong AI Tailwinds For Its Optical Business

Coherent Co. (NYSE: COHR) is a vertically integrated manufacturer of optical transceivers, materials, and laser systems. The company was formerly II-VI until it merged with Coherent Inc. and adopted its name. The company reported robust fiscal fourth-quarter 2024 earnings, lifting shares by 7%. Artificial intelligence (AI) tailwinds are helping drive demand for its optical transceiver business.  

Coherent operates in the computer and technology sector, competing with optical and photonic companies like IPG Photonics Co. (NASDAQ: IPGP), Lumentum Holdings Inc. (NASDAQ: LITE) and MKS Instruments Inc. (NASDAQ: MKSI).

What are Optical Transceivers?

These industry-specific devices convert electrical signals into light pulses (optical signals) and vice versa, enabling high-speed, high-bandwidth, and low-latency data transmission over fiber optic cables. Optical signals can travel longer and faster than electrical signals and are immune to electromagnetic interference. This results in reliable data transmission without any significant degradation. Coherent produced its 300 millionth Datacom transceiver in June 2024 as its Malaysia facility.

AI Boom Surges Demand for Coherent's Data Center Transceivers

Coherent sells 100G, 200G, and 400G transceivers to telecoms for high-speed, critical long-haul, and metro networks. It also makes 5G fronthaul transceivers that accommodate ever-expanding 5G networks. Thanks to the AI boom, Coherent is experiencing strong demand from data centers. Its 800G ethernet transceiver is experiencing brisk demand for high-speed data center interconnects, crucial to AI platforms.

Coherent Controls Its Supply Chain Through Vertical Integration

Vertical integration requires high capital expenditure, resulting in a more efficient and cost-effective supply chain. Coherent became vertically integrated through a series of acquisitions. Many of the larger acquisitions were formerly leading publicly traded companies. Finisar makes optical communication components and subsystems. nLight makes high-power semiconductor lasers. Rofin-Sinar Technologies makes industrial lasers. Raydiance makes lasers for medical and automotive manufacturing.

These acquisitions specialized in additional products, components, and materials along the supply chain. Investments in internal research and development have resulted in the creation of proprietary technologies and manufacturing processes. Strategic partnerships with collaborators and suppliers enable access to components and critical technologies, which fosters flexibility in its supply chain.

COHR Stock Forms a V Bottom

The daily candlestick chart for COHR shows an example of a V-bottom pattern. The lip line formed at $71.54 on July 31, 2024, as shares sank to a low of $52.14 in the following three days. COHR sharply bounced back to the lip line in the next eight days, retesting $71.54. Its fiscal Q4 2024 earnings release helped propel shares by 7% the following morning. The daily relative strength index (RSI) bounced off the 30-band and rose to the 63-band. The lip line is the new support on pullbacks. If it can hold there, it can form the leg of the breakout. Pullback support levels are at $71.54, $68.46, $65.64, and $63.59.

Coherent Beats Expectations with Strong Q4 Performance

Coherent reported fiscal Q4 2024 EPS of 61 cents, beating consensus estimates by a penny. Revenues rose 9% YoY to $1.31 billion, which beat consensus estimates for $1.28 billion. Non-GAAP gross margins rose 132 bps to 37.2%. Full-year 2024 revenue was $4.708 billion with a non-GAAP gross margin of 36% on $1.67 EPS.

The company issued in-line fiscal Q1 2025 EPS forecasts of 53 to 69 cents versus 65 cents consensus estimates. Revenues are expected between $1.27 billion and $1.35 billion versus $1.3 billion. Non-GAAP gross margins are expected between 36% and 38%. Total operating expenses are expected to be between $260 million and $280 million.

Coherent CEO's Upbeat Comments

Coherent CEO Jim Anderson was appointed two months ago. He was formerly the CEO of Lattice Semiconductor Co. (NASDAQ: LSCC). During the conference call, Anderson was upbeat about the company’s innovation and potential growth. He underscored the tremendous opportunity in AI data centers, which require the high-speed data connectivity that their optical transceivers provide.

Anderson stated, “While I believe this is a tremendous opportunity for the company, there are many other examples of secular growth opportunities ahead of us. Opportunities such as next-generation telecom systems, advanced displays, semi-cap equipment for next-gen fabs, industrial automation and robotics, EVs, and many others.”

Coherent Co. analyst ratings and price targets are at MarketBeat. There are 14 analyst ratings on COHR stock, comprised of 11 Buys and three Holds. The average consensus analyst price target is $75.31.

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