Coherent Corp Investment Thesis: Unlocking 30% Upside In AI-Driven Optics Growth

Coherent Corp. (COHR) is poised to benefit from AI-driven demand in optical components, with a 12-month upside potential of 30% to a target price of $95.
Q2 FY2025 saw 5% YoY revenue growth, margin expansion, and strong AI-related order momentum.
Strategic advantages include vertical integration, high-margin datacom products, and a growing presence in EV materials.
The Vietnam facility and merger synergies are expected to lower costs and unlock $150 million in annual savings by FY2026.
Key risks include supply chain vulnerability, rising debt, and intensifying competition from Lumentum and emerging players.

Executive Summary

Coherent Corp. (NYSE: COHR) stands out as a compelling investment in the rapidly evolving photonics and optics sector, driven by surging demand from AI data centers, telecommunications, 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 derived from a blended approach incorporating EV/EBITDA multiples at 15x forward estimates, reflecting the company’s robust growth trajectory and margin expansion potential, compared to a peer average of 14x. The thesis hinges on Coherent’s leadership in high-speed optical components, which are critical for AI infrastructure buildouts, positioning it to capture a growing share of a $50 billion TAM in datacom optics by 2030. In an era where AI investments are accelerating—evidenced by tech giants like Meta and Google ramping up capex—COHR offers investors exposure to this secular trend without the volatility of pure-play chipmakers, making it a timely addition to portfolios seeking diversified tech growth.

Business Overview

Coherent Corp. designs, manufactures, and markets engineered materials, optoelectronic components, and laser-based systems for a variety of high-tech applications. At its core, the company specializes in photonics—harnessing light for practical uses—spanning from industrial lasers used in manufacturing to optical transceivers that power data centers. Its revenue streams are diversified across three main segments: Networking (about 45% of sales, focusing on telecom and datacom optics), Materials (30%, including engineered materials like silicon carbide for semiconductors), and Lasers (25%, providing systems for industrial and scientific uses).

Key products include high-speed optical transceivers for AI-driven data centers, laser systems for precision manufacturing, and advanced materials for electric vehicles and renewable energy. Customers range from hyperscale cloud providers (e.g., Amazon Web Services) and telecom giants (e.g., Verizon) to industrial firms in automotive and aerospace. Geographically, Coherent generates roughly 40% of revenue from North America, 35% from Asia-Pacific (with growing exposure in China and Vietnam), and 25% from Europe, as per its latest 10-K filing. Market share varies: it holds a leading 15–20% in datacom optics globally, per estimates from LightCounting, but is a smaller player in lasers at around 5–10% against giants like IPG Photonics.

Sector & Industry Landscape

The photonics industry, encompassing lasers, optics, and related materials, operates within a $300 billion global market as of 2024, with a TAM projected to reach $500 billion by 2030, growing at a 9% CAGR according to McKinsey reports. Coherent’s serviceable addressable market (SAM) is narrower, around $50 billion, focused on high-growth niches like datacom (TAM $20 billion, CAGR 25%) and industrial lasers (TAM $15 billion, CAGR 8%). Structural tailwinds include the AI boom, which demands faster data transmission—optical components can handle 800G speeds essential for training large language models—and the shift to 5G/6G networks, plus electrification in autos requiring advanced materials.

Headwinds involve supply chain vulnerabilities, particularly rare earth dependencies from China, and cyclicality in industrial spending tied to manufacturing PMI. Key competitors include Lumentum Holdings (LITE), a direct rival in optics with a focus on 3D sensing; II-VI (now part of Coherent post-merger, but historically a peer); IPG Photonics (IPGP) in lasers; and Broadcom (AVGO) in broader semiconductors. Coherent positions as a challenger in optics, leveraging its merger synergies to disrupt leaders like Lumentum, while acting as a niche player in materials with specialized silicon carbide offerings.

Competitive Mapping

Company	Market Positioning	Key Strength	Revenue (FY2024, $B)
Coherent (COHR)	Challenger/Integrator	AI optics integration	4.7
Lumentum (LITE)	Leader in Telecom Optics	3D sensing tech	1.8
IPG Photonics (IPGP)	Leader in Industrial Lasers	Fiber laser dominance	1.3
Broadcom (AVGO)	Diversified Giant	Scale in semis	35.8

Data sourced from company filings and Yahoo Finance as of July 29, 2025.

Strategic Moats & Competitive Advantages

Coherent’s economic moat is moderate, rooted in technological expertise and scale from its 2022 merger with II-VI, creating a $5 billion revenue powerhouse. Key advantages include proprietary vertical integration—from raw materials to finished optics—allowing cost efficiencies and rapid innovation, such as 1.6T transceivers ahead of peers. Pricing power is evident in datacom, where margins exceed 30% due to high barriers to entry like precision manufacturing know-how.

Compared to Lumentum, Coherent boasts broader diversification, reducing reliance on Apple-driven 3D sensing cycles, while its silicon carbide tech offers a data moat in EV applications. Switching costs are high for customers: data centre operators face downtime risks swapping optics, fostering lock-in. Durability is solid but vulnerable to commoditisation in lasers, where IPG’s fibre tech edges out on efficiency. Overall, Coherent’s moat scores a 7/10—stronger than pure-play optics firms but trailing integrated giants like Broadcom.

Recent Performance

In Q2 FY2025 (ended June 30, 2025), Coherent reported revenue of $1.2 billion, up 5% YoY, beating consensus by 2% per Bloomberg data as of July 29, 2025. EPS came in at $0.65 non-GAAP, versus $0.58 a year ago, driven by datacom growth offsetting industrial softness. EBITDA rose 8% to $250 million, with margins expanding 150bps to 21%, thanks to Vietnam plant efficiencies.

Trends show revenue compounding at 6% annually over the past three years, from $3.2 billion in FY2022 to $4.7 billion in FY2024, while FCF improved from negative $100 million in FY2023 (post-merger integration) to $300 million in FY2024. Market reaction was positive, with shares up 3% post-earnings on July 28, 2025, per Yahoo Finance. The earnings call tone was optimistic, with CEO Chuck Mattera highlighting “record AI orders,” and guidance for FY2025 revenue of $5.0–5.2 billion, implying 8–10% growth.

Financial Trends Table

Metric	Q2 FY2025	Q2 FY2024	YoY Change
Revenue ($M)	1,200	1,143	+5%
EBITDA Margin (%)	21	19.5	+150bps
FCF ($M)	80	65	+23%

Sources: Company IR, Morningstar as of July 29, 2025.

Growth Drivers

Near-term (1–2 years), AI data centre expansions are the primary catalyst, with Coherent’s 800G transceivers poised to capture 20% of a $10 billion market by 2027, potentially adding $500 million in revenue based on internal projections. Mid-term (3–5 years), geographic expansion via the new Vietnam facility—inaugurated July 2025—will lower costs by 10–15% and tap Asia’s 5G rollout, targeting $1 billion in regional sales. Long-term, innovation in silicon carbide for EVs could drive 15% CAGR in materials, fuelled by global electrification mandates.

M&A synergies from II-VI integration: Expected to yield $150 million in annual savings by FY2026.
Regulatory tailwinds: U.S. CHIPS Act subsidies for domestic semis, indirectly boosting optics demand.
Macro: Lower interest rates could spur industrial capex, lifting laser sales by 5–7%.

Quantified impact: Base case assumes 10% revenue CAGR through 2028, with EBITDA margins hitting 25%.

Risks & Bear Case

Material risks include:

Geopolitical tensions: Reliance on China for 20% of supply chain exposes to U.S.–China trade wars, potentially disrupting 15% of revenue.
Cyclical demand: Industrial slowdowns, as seen in 2023, could shave 10% off laser sales.
Competition intensification: Lumentum’s R&D push might erode Coherent’s 20% datacom share.
Debt burden: $4 billion net debt (3x EBITDA) risks higher interest costs if rates rise.
Technological obsolescence: Failure to scale to 3.2T optics could lag AI needs.
Regulatory scrutiny: Antitrust reviews on mergers could limit expansion.
Supply chain inflation: Rare earth price spikes might compress margins by 200bps.
Execution risks: Vietnam plant ramp-up delays could miss cost targets.
Macro recession: Global slowdown hitting tech capex.
ESG backlash: If sustainability goals falter, investor outflows ensue.

The bear case posits stagnant AI spending amid economic headwinds, leading to flat revenue and margins contracting to 18%, valuing the stock at $50 (EV/EBITDA 10x), a 30% downside.

Valuation

Coherent trades at 14x forward EV/EBITDA as of July 29, 2025, below its 5-year average of 16x and peer median of 15x (Lumentum at 13x, IPGP at 18x), per Bloomberg. P/E is 25x forward, reasonable for 10% growth, while P/S at 3x lags historical 4x. Our DCF model, assuming 10% WACC and 3% terminal growth, yields an intrinsic value of $98, factoring in $600 million FCF by FY2027.

Justification: Superior margin profile (22% EBITDA vs. peers’ 20%) and balance sheet deleveraging support a premium. Sum-of-parts values Networking at 18x EBITDA ($60/share), Materials at 12x ($20), Lasers at 10x ($15).

Valuation Scenarios

Scenario	Revenue CAGR	EBITDA Margin	Target Price	Probability
Bull	15%	25%	$120	30%
Base	10%	22%	$95	50%
Bear	5%	18%	$50	20%

Based on internal models using data from SEC filings and FT as of July 29, 2025.

ESG & Governance Factors

Coherent scores moderately on ESG, with a MSCI rating of BBB as of July 2025. Environmentally, it commits to net-zero by 2050, reducing Scope 1/2 emissions 20% since 2020 via efficient manufacturing, though water usage in optics production draws scrutiny. Socially, diverse workforce (40% women in management) and supplier ethics are strengths, but no major controversies. Governance is solid: Independent board (80%), no dual-class shares, and recent insider buys totalling $2 million in Q2 2025 signal confidence. Proxy trends show 95% approval on pay, per ISS data. These factors enhance the thesis by attracting ESG funds, potentially lowering capital costs, but laggards in Scope 3 emissions could pose reputational risks.

Sentiment & Market Positioning

Market sentiment is bullish, with 75% of analysts rating Buy (consensus target $90) per WSJ as of July 29, 2025. Institutional ownership stands at 85%, led by Vanguard (10%) and BlackRock (8%), while short interest is low at 3% of float. Recent upgrades from BofA on AI exposure boosted shares 5% in July. Insider activity: CEO sold $1 million in May but bought back in June, net positive. Overall, positioning favours growth investors, with momentum from Vietnam expansion.

Conclusion

We reiterate our Buy rating on COHR with a $95 target, anchored in its AI optics leadership and margin upside. Key conviction points include datacom growth catalysts and integration synergies, outweighing risks like geopolitics. Investors should monitor Q3 earnings for AI order updates and debt reduction progress—strong beats could propel shares higher. In a market hungry for AI enablers, Coherent offers a balanced, underappreciated opportunity for long-term portfolios.