Coherent Corp Investment Thesis: Capitalising On AI Optics For 30% Upside In 2025

Coherent Corp. receives a Buy rating with a $95 12-month target price, reflecting ~30% upside from $73.50 as of July 29, 2025.
Growth is powered by demand for AI-driven datacom optics, with 800G and 1.6T transceivers driving segment momentum.
FY2024 revenue rose 10% YoY to $4.7 billion, with EBITDA margins expanding to 16.8% and strong free cash flow generation.
Strategic advantages include vertical integration, IP strength, and geographic diversification — newly bolstered by a Vietnam facility.
Risks are embedded: supply chain, debt levels, and technological disruption — but upside potential remains compelling, with sector tailwinds firmly behind it.

Executive Summary

Coherent Corp. (NYSE: COHR) stands out as a compelling investment in the photonics and materials sector, leveraging its expertise in lasers, optics, and advanced materials to capitalize on surging demand from AI-driven data centers and industrial applications. Our analysis supports a Buy rating with a 12-month target price of $95, implying approximately 30% upside from the current price of $73.50 as of July 29, 2025. This valuation is based on a blended forward P/E multiple of 22x applied to our FY2026 EPS estimate of $4.30, reflecting expected revenue growth of 12% CAGR through 2027, margin expansion to 18% EBITDA, and free cash flow generation of $450 million annually. The rating factors in Coherent’s strong positioning in high-growth areas like AI optics and datacom transceivers, balanced against execution risks in a competitive landscape.

This stock matters now amid the AI boom, where optical components are critical for high-speed data transmission. With global data center capex projected to exceed $250 billion in 2025 (source: Bloomberg, as of July 2025), Coherent’s innovations in 800G and 1.6T transceivers position it to capture a growing share of this market, potentially driving earnings surprises in the coming quarters.

Business Overview

Coherent Corp. develops and manufactures engineered materials, optoelectronic components, and laser-based systems used in industrial, communications, electronics, and scientific applications. The company operates through three main segments: Materials, Networking, and Lasers, which collectively generated $4.7 billion in revenue for FY2024 (ended June 30, 2024, per SEC filings as of July 2025).

Core products include laser systems for cutting and welding, optical transceivers for data centers, and advanced materials like silicon carbide substrates for power electronics. Revenue streams are diversified: Networking (45% of FY2024 revenue) focuses on datacom and telecom optics; Lasers (35%) serves industrial manufacturing; and Materials (20%) supplies components for semiconductors and displays. Key customer segments span hyperscale data centers (e.g., Amazon, Google), industrial manufacturers (e.g., automotive and aerospace), and telecom providers.

Geographically, Coherent derives 45% of revenue from North America, 30% from Asia-Pacific (with growing exposure in China and Vietnam), and 25% from Europe (Yahoo Finance data, as of July 29, 2025). Market share estimates place Coherent at 15–20% in high-power laser systems globally and 10% in datacom transceivers, per company IR reports and Morningstar analysis as of Q2 2025.

Sector & Industry Landscape

The photonics and optoelectronics industry, encompassing lasers, optics, and advanced materials, has a Total Addressable Market (TAM) estimated at $150 billion in 2025, growing to $250 billion by 2030 at a 10% CAGR (FT estimates, as of July 2025). Coherent’s Serviceable Addressable Market (SAM) is around $50 billion, focused on high-end applications like AI data centers and electric vehicles.

Structural tailwinds include the AI revolution driving demand for high-bandwidth optics, with data center traffic expected to triple by 2028 (WSJ, as of June 2025). Headwinds involve supply chain disruptions and trade tensions, particularly in semiconductors. Key competitors include Lumentum Holdings (LITE), with a focus on telecom optics; II-VI Incorporated (now part of Coherent post-merger); and IPG Photonics (IPGP), a leader in fiber lasers. Coherent positions as a market leader in integrated photonics, blending scale with innovation, unlike niche players like NeoPhotonics or challengers such as Fabrinet.

Competitor	Market Cap (as of Jul 29, 2025)	Key Strength	Positioning vs. Coherent
Lumentum (LITE)	$4.2B	Telecom transceivers	Challenger in datacom
IPG Photonics (IPGP)	$3.8B	Fiber lasers	Leader in industrial, direct rival
Fabrinet (FN)	$8.5B	Contract manufacturing	Niche supplier, less integrated

Strategic Moats & Competitive Advantages

Coherent’s economic moat stems from its technological expertise in vertical integration, from materials science to finished optics, enabling cost efficiencies and customization. This contrasts with competitors like Lumentum, which rely more on assembly. Pricing power is moderate, supported by high switching costs in data center deployments where transceiver compatibility locks in customers for years.

Scale advantages include a global manufacturing footprint, recently expanded with a $127 million plant in Vietnam (company announcement, July 2025), reducing dependency on China. Data and IP portfolios provide durability, with over 5,000 patents protecting innovations in AI optics. Compared to IPGP’s focus on laser efficiency, Coherent’s broader portfolio offers better diversification, though it lacks the brand dominance of legacy players like Corning in glass optics.

Switching Costs: High for datacom clients due to interoperability standards.
Customer Lock-in: Multi-year contracts with hyperscalers ensure recurring revenue.
Durability: Moat likely to strengthen with AI demand, but vulnerable to technological leaps by startups.

Recent Performance

In Q4 FY2024 (ended June 30, 2024), Coherent reported revenue of $1.31 billion, up 9% YoY, beating consensus by 2% (Bloomberg, as of July 2025). Non-GAAP EPS was $0.61, versus $0.52 in Q4 FY2023, driven by a 15% increase in Networking segment sales. EBITDA reached $220 million, with margins expanding 150 basis points to 16.8%, reflecting cost controls and higher-margin AI products.

Trends show revenue growing from $4.1 billion in FY2023 to $4.7 billion in FY2024 (10% CAGR), while FCF improved to $320 million from $250 million, aided by working capital efficiencies. Market reaction was positive, with shares up 5% post-earnings (Yahoo Finance, July 2025). Earnings call tone was optimistic, with management guiding FY2025 revenue to $5.2–5.4 billion (up 10–15%) and emphasizing AI tailwinds. Historical comparison: Q4 FY2023 revenue was $1.20 billion, highlighting sustained momentum.

Metric	Q4 FY2024	Q4 FY2023	YoY Change
Revenue	$1.31B	$1.20B	+9%
EBITDA Margin	16.8%	15.3%	+150 bps
FCF	$90M	$70M	+29%

Growth Drivers

Near-term growth (FY2025) is fueled by AI data center expansions, with Coherent’s 800G transceivers expected to contribute $500 million in incremental revenue, a 20% uplift (internal estimates based on company guidance). Mid-term catalysts include market expansion into EV power electronics via silicon carbide materials, targeting $1 billion SAM by 2027.

Long-term drivers encompass M&A (e.g., potential bolt-ons in optics) and innovation in 1.6T transceivers, projected to grow at 25% CAGR through 2030. Cost-cutting initiatives aim to save $100 million annually by FY2026, while regulatory shifts favouring domestic manufacturing (e.g., CHIPS Act) could add 5–10% to U.S. revenue. Macro tailwinds like lower interest rates may boost industrial capex, quantifying to 8% overall growth acceleration.

New Products: AI optics lineup, 15% revenue impact in FY2026.
Expansion: Vietnam plant ramps production by 20% capacity.
M&A: Strategic acquisitions to enhance materials portfolio.

Risks & Bear Case

Key risks include: 1) Supply chain disruptions from geopolitical tensions in Asia, potentially cutting revenue by 10%; 2) Intense competition eroding margins to 14%; 3) Regulatory scrutiny on exports to China; 4) Technological obsolescence if quantum optics disrupt lasers; 5) High debt levels ($4.5 billion net debt as of Q4 FY2024) increasing interest expense amid rate hikes; 6) Macro slowdown in data center spending; 7) Execution risks in new facilities; 8) Currency fluctuations impacting 30% international revenue; 9) Customer concentration with top clients at 40% of sales; 10) ESG-related supply chain issues.

The bear case posits stagnant AI adoption leading to 5% revenue decline in FY2026, margins compressing to 12%, and EPS dropping to $2.50, justifying a $50 share price. This scenario assumes prolonged trade wars and competitor gains, eroding Coherent’s market share to under 10%.

Valuation

Coherent trades at 18x forward P/E (FY2025 EPS estimate $3.50), below its 5-year average of 22x and peers’ 20x median (Morningstar, as of July 29, 2025). EV/EBITDA is 12x, versus historical 14x, reflecting undervaluation given 12% growth. P/S stands at 2.5x, attractive for a high-margin tech firm; P/B is 1.8x, indicating balance sheet strength.

Our DCF model assumes 10% WACC, 3% terminal growth, yielding a $92 fair value. Sum of Parts values Networking at 3x sales ($6 billion), Lasers at 2.5x ($4 billion), and Materials at 2x ($2 billion), totaling $12 billion enterprise value. Justification: Superior growth and 18% EBITDA margins warrant a premium to peers like LITE (15x P/E).

Scenario	Revenue Growth	EPS (FY2026)	Target Price	Probability
Bull	15%	$5.00	$110	30%
Base	12%	$4.30	$95	50%
Bear	5%	$3.00	$65	20%

ESG & Governance Factors

Coherent scores moderately on ESG, with a B rating from MSCI (as of July 2025), driven by energy-efficient laser technologies reducing industrial emissions. Environmental efforts include a 20% reduction in Scope 1 emissions by 2024 (company sustainability report). Social factors highlight a diverse workforce (40% women in management) but face scrutiny over supply chain labour in Asia.

Governance is strong, with an independent board (80% outsiders) and no major controversies. Recent insider sales were minimal (less than 1% of shares), and proxy trends show 95% approval for executive pay. These factors bolster the thesis by mitigating reputational risks, though enhanced ESG disclosures could attract more sustainable funds.

Sentiment & Market Positioning

Market sentiment is positive, with 65% institutional ownership (Vanguard and BlackRock top holders, per SEC 13F as of Q2 2025). Short interest is low at 3.5% of float (Yahoo Finance, July 29, 2025). Analyst ratings: 12 Buys, 4 Holds, average target $88 (Bloomberg consensus).

Recent upgrades from JPMorgan cite AI growth; no notable insider trading. Fund flows show inflows from tech-focused ETFs, positioning Coherent as a mid-cap growth play.

Conclusion

We reiterate our Buy rating on Coherent Corp. with a $95 target, anchored in its leadership in AI optics and margin expansion potential. Key conviction points include robust FY2025 guidance, strategic expansions, and undervalued multiples. Investors should monitor Q1 FY2025 earnings for AI order updates and watch for geopolitical developments. This positions Coherent as a high-conviction pick for portfolios seeking exposure to tech infrastructure growth.