Coherent beats earnings estimates on datacenter demand
Laser technology company posts 17% revenue growth despite 8% stock decline on valuation concerns
Coherent Corp. shares fell 8% on Wednesday after the laser technology company reported better-than-expected second-quarter earnings, as investors questioned whether the high-growth optics boom can sustain its premium valuation.
The Santa Clara-based company reported revenue of $1.69 billion, exceeding analyst estimates of $1.64 billion and representing a 17% year-over-year increase. Non-GAAP earnings per share of $1.29 topped expectations by $0.08, marking a 35% increase from the prior year.
The strong performance was driven primarily by surging demand from datacenter operators, with the company's Datacenter & Communications segment generating $1.21 billion in revenue, up 34% year-over-year from $904.6 million. Coherent highlighted record bookings for 800G and 1.6T transceivers, with orders extending more than a year out as cloud infrastructure providers accelerate deployment of high-speed optical networking equipment.
"We delivered strong year-over-year revenue growth in the December quarter, driven by another quarter of strong demand in our datacenter and communications segment," said Jim Anderson, chief executive officer of Coherent. "We expect continued strong growth in the second-half of fiscal 2026 and throughout fiscal 2027 based on strong datacenter and communications demand."
Despite the earnings beat and robust guidance, Coherent's stock declined to approximately $193 in Wednesday trading, extending what had been a 164% gain over the past year. The decline reflects investor concerns about the company's premium valuation, with shares trading at a forward price-to-earnings ratio of roughly 35 times earnings.
Some analysts pointed to cash flow concerns from the prior quarter, including a 70% year-over-year plunge in operating cash flow and negative free cash flow of $57.9 million, which raised questions about the capital intensity required to expand production capacity for optical components.
The company provided third-quarter guidance for revenue between $1.70 billion and $1.84 billion, representing 5% sequential growth at the midpoint. Non-GAAP EPS is expected to range from $1.28 to $1.48, with the midpoint of $1.38 indicating 7% sequential growth. The guidance includes $5 million from the Munich tools business, which Coherent sold at the end of January as part of its strategic focus on datacenter and communications markets.
Coherent's Industrial segment revenue declined to $477.6 million from $530.1 million in the prior year, reflecting the company's ongoing shift away from traditional laser manufacturing toward higher-growth optical communications applications. The company said it expects demand in the industrial segment to improve throughout 2026.
The earnings report highlights the growing importance of optical components in artificial intelligence infrastructure. As datacenters upgrade to handle AI workloads, demand for high-speed transceivers and photonics products has surged, positioning Coherent as a key supplier to major cloud providers. The company announced plans for aggressive capacity expansion in indium phosphide production and new transceiver facilities to meet this demand.
Analysts at major brokerage firms maintain a positive outlook on Coherent's long-term prospects, though the immediate concern is whether the company can maintain profit margins while scaling production to meet explosive datacenter demand. With 20 of 20 analysts rating the stock a buy or strong buy, according to market data, the consensus remains that the optical communications growth story has room to run, even at current valuation levels.