Coherent Corp. (COHR Quick QuoteCOHR - Free Report) has been one of the standout performers in the technology hardware space over the past year. Its shares have soared 155%, sharply outperforming the industry’s 18% decline and the Zacks S&P 500 Composite’s 17% gain. More recently, however, the stock has fallen 24% over the past month, entering correction territory after its remarkable run.

                                                             Image Source: Zacks Investment Research

This pullback raises a crucial question: Does it represent an attractive buying opportunity, a reason to hold existing positions, or a signal to remain on the sidelines? Although Coherent’s valuation remains elevated, its improving fundamentals suggest that the company’s long-term growth story remains firmly intact.

Let’s delve deeper.

COHR’s AI-Centric Portfolio Creates Strong Growth

COHR’s business mix has shifted decisively toward artificial intelligence infrastructure and optical connectivity. Datacenter & Communications generated nearly 79% of fourth-quarter fiscal 2026 revenues compared with roughly 67% a year earlier, as segment sales surged 58.6% year over year to $1.6 billion. Demand for high-speed transceivers, optical circuit switching, co-packaged optics, multi-rail systems and PhotonLink solutions should support further expansion as datacenter operators upgrade network capacity. Demand visibility extending into calendar 2028 and long-term agreements running through the decade provide additional confidence.

However, this rapid transformation has increased COHR’s dependence on hyperscaler capital spending and timely customer deployments. Industrial revenues declined 15.8% year over year to $430.5 million, offering limited diversification against a datacenter slowdown. Therefore, while AI infrastructure represents a compelling multiyear opportunity, COHR’s performance is becoming increasingly sensitive to datacenter investment cycles, customer concentration and execution within its optical-connectivity operations.

COHR’s Capacity Expansion Can Unlock Demand

COHR’s growth potential depends heavily on removing indium phosphide production constraints. The company expects output to double year over year during the current quarter, followed by another increase exceeding 100% in calendar 2027. This expansion should help COHR address strong demand for 800-gigabit and 1.6-terabit transceivers and support emerging applications such as co-packaged optics and optical circuit switches. The transition to six-inch indium phosphide manufacturing is particularly important because the platform can reportedly generate roughly four times the output at about half the cost of the older three-inch process. Higher production yields, improved scale and lower unit costs could therefore support both revenue growth and margin expansion.

However, the ramp carries meaningful execution risk. Delays in equipment qualification, manufacturing yield improvement or customer certification could restrict shipments despite healthy demand. COHR must consequently convert its ambitious capacity investments into reliable production without compromising quality or creating excess supply if customer deployment schedules change.

COHR’s Revenue Growth Is Becoming More Profitable

COHR’s profitability trends indicate that its strong revenue growth is translating into better operating leverage. Fiscal fourth-quarter GAAP gross margin increased 277 basis points year over year to 38.5%, while adjusted gross margin expanded 215 basis points to 40.2%. Adjusted operating margin advanced 381 basis points to 21.8%, supported by higher manufacturing yields, lower input costs, pricing actions and a more favorable product mix. Adjusted operating income grew 62.1%, significantly faster than the 33.8% increase in revenues, demonstrating improved cost absorption and operating efficiency. The midpoint of first-quarter fiscal 2027 adjusted gross-margin guidance stands at 40.5%, suggesting that profitability can remain resilient as production scales.

Nevertheless, maintaining these gains will require continued yield improvements and disciplined capacity execution. A larger contribution from advanced optical products should strengthen margins, but manufacturing inefficiencies or unfavorable pricing could offset the benefits. Sustained margin expansion would confirm that COHR’s AI-led growth is creating durable economic value rather than merely increasing business volume.

Premium Valuation Appears Supported by Improving Fundamentals

Coherent currently trades at approximately 25.89 times forward earnings, significantly higher than the industry's 21.02 times forward earnings multiple.

At first glance, that premium valuation may appear demanding. However, investors are paying for a business that is becoming fundamentally different from the cyclical hardware manufacturer it once was. Multi-year customer commitments, record backlog, expanding margins, stronger cash generation and a healthier balance sheet are all contributing to a more predictable earnings profile.

While short-term volatility is always possible following such a strong rally, Coherent's growing exposure to AI infrastructure spending and long-term customer agreements provides a solid foundation for sustained growth over the coming years.

Coherent's Top and Bottom-Line Expectations Remain Robust

Coherent's growth prospects remain compelling, supported by strong demand across AI-driven datacenter infrastructure and improving operating leverage. The Zacks Consensus Estimate projects fiscal 2027 revenues of $10.68 billion, indicating 50% year-over-year growth. Momentum is expected in fiscal 2028, with revenues forecasted to increase 35% from the prior year.

The earnings outlook is equally impressive. The consensus estimate indicates fiscal 2027 EPS of $9.38, suggesting 67.2% year-over-year growth. Looking ahead, analysts expect EPS to climb another 46% in fiscal 2028, indicating confidence that Coherent's expanding AI-related business, improving margins and higher manufacturing utilization will continue to drive profitability.

Such robust top- and bottom-line projections reinforce the investment case that Coherent's transition toward AI infrastructure is creating a stronger, more predictable earnings profile despite the stock's premium valuation.

                                                                      Image Source: Zacks Investment Research

Two Optical Peers to Watch

Among optical peers, Lumentum Holdings (LITE Quick QuoteLITE - Free Report) and Applied Optoelectronics (AAOI Quick QuoteAAOI - Free Report) provide useful benchmarks. Lumentum Holdings generated fiscal fourth-quarter revenues of $1.01 billion, more than doubling year over year, and guided to further sequential growth. Applied Optoelectronics posted second-quarter revenues of $191.9 million, up 86%, as its 800G ramp strengthened.

Lumentum Holdings offers broader scale and stronger margins, whereas Applied Optoelectronics brings faster expansion from a smaller base. Coherent’s greater revenue scale is an advantage, but the progress of both rivals shows that competition for AI-optics demand remains intense. Sustaining leadership will require converting demand into consistent margins and cash.

COHR is a Buy After the Pullback

Coherent’s recent pullback offers an attractive entry point for investors willing to tolerate near-term volatility. The company’s increasingly AI-focused portfolio, demand visibility and expanding optical capacity position it to benefit from sustained datacenter investment. At the same time, stronger manufacturing yields, a richer product mix and improving operating leverage are turning rapid revenue growth into faster earnings expansion. Risks surrounding hyperscaler spending, customer concentration and execution remain, while the stock’s premium valuation leaves little room for disappointment. Even so, the improving financial profile and compelling multiyear growth runway outweigh those concerns. COHR therefore looks like a buy for growth-oriented investors.

COHR currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.