Coherent ((COHR Quick QuoteCOHR - Free Report) ) delivered a strong September quarter and growth outlook on November 4 and shares bounced hard out of the semiconductor meltdown the next day when the SOX index lost 12%. I bought shares under $170 for my TAZR Trader portfolio.

The optical components maker grew revenue 50% to $2.37 billion, landed earnings above the top of its own guide with 80% growth, and raised its long-term gross margin target. Management says next year's orders are essentially booked.

The catch: building for that demand is costing cash now. Operating cash flow was negative and capex hit $776M. CEO Jim Anderson said customers help pay up front, but he didn't say how much.

Quarter Details

Coherent’s EPS of $2.09 beat the Zacks Consensus Estimate of $2 in the quarter, while revenues of $2.37 billion bested the consensus mark of $2.32 billion. Datacenter and communications revenue climbed to $1.95 billion from $1.09 billion, for a year-over-year advance of 79%.

Non-GAAP Operating Income came in at $550M vs estimates of $527 million. Non-GAAP Gross Margin was solid at 40.6% for a y-o-y advance of 184 basis points.

Management announced a new LTA deal with their PhotonLink platform for $20 billion over 5 years with "a leading AI data center customer," (not named) with revenue beginning early 2028. This is likely NVIDIA ((NVDA Quick QuoteNVDA - Free Report) ) as their partnership in silicon photonics progresses since Jensen Huang's $2 billion investment in Coherent in March. 

CEO Anderson said calendar 2027 is "basically booked out" and customers are now booking calendar 2028. Orders and multiple new long-term agreements (LTAs) were signed in Q1.

Strong Q2 Outlook, Plus InP Deal

Coherent forecast Q2 revenue of $2.55–$2.75 billion and EPS of $2.28–$2.48.

Analysts had already been raising EPS estimates before the company report, with the Zacks annual consensus moving from $9.44 to $9.73 for FY 2027, which began in July. After the conference call, they boosted the consensus another 5% to $10.25.

And FY 2028 estimates jumped over 10% in the past few weeks from $13.88 to $15.38, giving the stock a forward P/E of just 15X.

Speaking of valuation, on a price-to-sales basis, COHR trades at just 4X this year's consensus of $11 billion -- growing 56% -- and just 3X FY'28 projections of over $15 billion, which represents a 37% annual advance.

Sherri Luther, CFO, said, “Our Q1 results delivered substantial operating leverage and durable gross margin expansion, driven by pricing optimization and cost improvements. This margin strength gives us the confidence to raise our longer-term target. We expect to achieve our first quarter with non-GAAP gross margin above 45% before the end of calendar 2028.”

Optics Technology Holding Co. said its unit signed a letter of intent with Coherent to supply indium phosphide (InP) substrates, an essential ingredient for optical components. Internal laser-chip capacity doubled YoY in Q1, a quarter early, with a plan to double again by end of calendar 2027. The agreement is expected to be worth at least $601 million. 

Anderson emphasized InP manufacturing expansion as essential to supporting optical transceivers and integrated optics products, so the additional capex seems well-placed.

Optics Technology will supply 6-inch indium phosphide (InP) semiconductor substrates, with shipments scheduled to run from 2027 through 2029. The substrates will supply Coherent's production facilities in Switzerland and Sweden.

Conference Call Highlights

Responding to a JPMorgan analyst, Anderson outlined expectations for PhotonLink quarterly revenues to exceed $100 million in the March quarter and $250 million before the end of calendar 2027. He emphasized that demand will expand as optical connectivity penetrates scale-up networks.

Addressing a Morgan Stanley analyst, Anderson said the company has secured necessary substrates through multiple suppliers. Management also highlighted increasing internal component sourcing as a key opportunity for reducing production costs and improving profitability.

Regarding their pipeline, management talked about more than 10 CPO (co-packaged optics), more than 10 NPO (near-packaged optics), and more than 5 chip-to-chip engagements beyond the two anchor customers.

Regarding their addressable markets, the company estimates about $30 billion for CPO, NPO and chip-to-chip optics by 2030, with OCS (optical circuit switching) crossing $4 billion.

Analysts estimate Coherent's addressable market could reach $9.4 billion in 2027 and $36 billion in 2028.

Analyst Views and Price Target Changes

Coherent got mixed target changes: Citi raised its Buy target to $440 from $420, while Rosenblatt cut its Buy target to $400 from $500 and Needham lowered its Buy target to $340 from $380. 

JPMorgan cut Coherent’s price target to $385 from $465, keeping an Overweight rating, citing that their industry checks point to strong optical demand through late 2026 and into 2027. 

Needham analyst Ryan Koontz wrote in a note "COHR also raised GM expectations, now forecasting its first quarter above 45% NG GM before the end of 2028," Koontz added. "A steeper GM trajectory amidst strong AI demand meaningfully improves our view on the stock, particularly in light of the LITE acquisition."

"Meanwhile, the company recorded its first revenues associated with PhotonLink in the quarter, seemingly associated with the NVIDIA (NVDA Quick QuoteNVDA - Free Report)
 scale-out CPO platform," said Susquehanna analyst Christopher Rolland in a Thursday note. "Revenues here should grow to ~$100M in the March quarter and ramp to ~$250M by the end of 2027. Beyond transceivers, Coherent is also ramping OCS shipments (primarily 320x320) into scale across, scale out and scale up applications."

"Outside of DC, Communications results were better than expected, driven primarily by rapid growth in scale across revenue," he added. "Indeed, the company's scale across business is now yielding $1B of annualized revenue and is expected to reach ~$2B of annualized revenue by the end of 2027. Furthermore, multi-rail is also expected to begin contributing revenue in the upcoming March quarter."

Bernstein on COHR: Optical value keeps rising as GPU architecture improves

In a November 10 report, Bernstein semi analysts estimate about $5.4 million of optical content in a 576-GPU pod (8 racks) versus roughly $1 million for the earlier Vera Rubin setup, as bandwidth rises 7.7X.

About $1 million of that would come from CPO, while pluggable modules would still make up the larger share.

Rubin Ultra could increase the optical content in each GPU cluster by more than 5X. Bernstein kept its Outperform rating and a $350 price target.

Jensen's 5-Layer Cake is Delicious for COHR

This quarter proves there is an expanding and durable pie (er... cake) that Coherent is primed to capture more of. And if they can maintain GMs of 40-42%, the stock should do very well. 

As icing on that cake, CEO James Anderson purchased 5,000 shares of COHR at $199.48 per share recently for a total of $997,400. He directly owned 190,287 shares after the transaction.

Disclosure: I own COHR and NVDA shares for the Zacks TAZR Trader portfolio.