Coherent's 112% Rally Reveals the Hidden Trade-offs in the AI Hardware Boom

2026-01-12 18:40:21

Coherent Corp. (COHR) has delivered a stunning 111.7% return over six months, decisively beating the broader industry’s 13.8% rise and the S&P 500’s 13.6% performance. But behind this eye-catching surge lies a complex story of booming AI demand colliding with expensive valuations and intensifying competition.

The AI Datacenters Feeding Coherent’s Growth

The semiconductor landscape is rapidly reshaping around artificial intelligence infrastructure. During its fiscal 2026 earnings presentation, Coherent management highlighted unprecedented adoption of 800G and 1.6T transceivers, signaling explosive growth potential for the coming year. The company’s optical circuit switches—critical components in AI datacenters—represent an incremental $2 billion addressable market opportunity alone.

On the manufacturing front, Coherent has been scaling up its Indium Phosphide (InP) technology with improving yields on 6-inch platforms, now producing 2 billion VSCEL devices annually on its 6-inch arsenide technology. This operational momentum prompted the company to launch 6-inch InP production at its Jarfalla facility in Sweden, betting big on surging datacenter demand.

The broader AI market paints a compelling picture. According to Grand View Research, the global AI sector is valued at $390.9 billion and projected to grow at a compound annual growth rate of 30.6% through 2033. For Coherent, this expanding ecosystem creates substantial runway for its optical and semiconductor portfolio.

Financial Foundation Looks Solid

As of September 2025, Coherent held $875 million in cash against just $48 million in debt—a fortress balance sheet by any measure. The company’s liquidity position strengthened further, with a current ratio of 2.33 in Q1 fiscal 2026 (up 6.4% sequentially), comfortably outpacing the industry average of 1.58.

Growth Projections Point Upward, But at a Cost

Analyst consensus expects Coherent to generate $6.7 billion in fiscal 2026 revenue, representing 15.1% year-over-year growth, followed by 14.5% expansion in fiscal 2027. On the earnings side, expectations are even rosier: fiscal 2026 EPS is forecasted at $5.1 (44.5% YoY growth), with fiscal 2027 EPS anticipated to climb 24.6%.

Over the past two months, analysts have revised fiscal 2026 and 2027 EPS estimates upward eight and six times respectively, with zero downward revisions. The consensus revenue and earnings estimates themselves have been raised 11.1% and 4.8% in the same window—a clear sign of growing confidence.

Yet the stock’s valuation tells a different story. Trading at 32.42 times forward earnings against an industry average of 25.32 times, Coherent commands a significant premium. Its trailing 12-month EV-to-EBITDA ratio stands at 24.07 times versus the sector average of 17.81 times, suggesting the market has already priced in much of the good news.

Silicon Carbide Competition Intensifying

Coherent operates in a crowded SiC market. Wolfspeed commands 12% market share in Silicon Carbide, while ON Semiconductor dominates the MOSFET segment with 32.5% share, leveraging strength in high-performance power devices for electric vehicles.

Notably, Coherent’s material segment experienced a 6% revenue decline year-over-year in fiscal 2025, reflecting softer end-market demand. To maintain competitive position against these entrenched rivals, the company will need substantial reinvestment—a dynamic that could pressure margins before driving future profitability.

The Case for Caution

Coherent presents a paradox: a company riding a powerful structural wave of AI infrastructure demand while facing valuation headwinds and competitive pressures. The stock’s 112% rally has compressed the margin of safety considerably. Even with strong revenue and earnings growth ahead, the premium valuation leaves little room for execution mishaps or market disappointment.

Current positioning suggests a hold strategy is warranted—neither a compelling buy at current prices nor a reason to exit. Investors should monitor quarterly earnings for any signs of pricing pressure or market share loss, and reassess entry points if valuations become more attractive relative to growth prospects.

Coherent ranks #3 (Hold) on the Zacks scale, reflecting this balanced view on risk-reward.

This page may contain third-party content, which is provided for information purposes only (not representations/warranties) and should not be considered as an endorsement of its views by Gate, nor as financial or professional advice. See Disclaimer for details.