Coherent, Inc. COHR

Key data

The business

Coherent makes the optical guts of communication systems: transceivers that turn electrical signals into laser light and back, the lasers themselves, and the exotic crystals and wafers those parts are grown from. The company still carries the old II-VI registration; II-VI bought the original Coherent in 2022 and took its name. Today the pull is AI datacenters, where hundreds of thousands of chips must talk to each other and every link needs a transceiver. A single 1.6-terabit module, smaller than a stick of gum, plugs into a switch and fires data down glass fiber at speeds copper cannot touch. Two customers each bought more than 10% of everything Coherent sold in fiscal 2026, and the company expects that concentration to persist. The moat is vertical: Coherent grows its own indium phosphide and silicon carbide, a materials-to-systems chain that is slow and costly for a rival to copy.

The numbers

Revenue climbed every quarter of fiscal 2026 as the AI ramp took hold.

Revenue rose from $1.53B to $2.05B across the last five quarters, a clean sequential ramp through the fiscal year end. Net income is lumpier: the $226M first quarter of FY26 came on the year's lowest sales, a sign one-time gains flatter the profit line. Non-GAAP earnings beat estimates all four quarters, most recently $1.74 against $1.62.

Fiscal 2026 is the turn: revenue up 22.5% and the first genuine profit since the merger. FY25 net income was positive yet EPS negative, because preferred dividends sat ahead of common. You pay 68x that $4.12, but the year's profit was flattered by gains, and cash backed only a dime of each reported dollar. Against forward estimates the stock is 30x FY27 and 20x FY28, and those rest on revenue leaping 49% to $10.6B next year. Over twelve years the multiple ran between 17 and 31 times earnings; you are paying the top of forward and far above trailing history for the steepest growth the company has ever promised.

Operating cash flow collapsed to $80M while capital spending more than doubled, so free cash flow swung to negative $1.0B. The company cannot yet fund its own growth. Net debt sits near $2.1B, about 1.3x EBITDA, manageable but no longer shrinking. What this memo believes that the tape does not: the reported profit is lower quality than 68x implies, and the number that settles it is next year's operating cash flow, which must swing back toward the $600M it made before the ramp or the growth is being rented, not earned.

Management

The insider record is one-way. Over twelve months insiders sold $1.12B across 39 sales and bought nothing. The bulk is Bain Capital's $1.075B block in November 2025, the sponsor that financed the 2022 merger cashing out, less a read on the business than a fund taking its return; plan status is not disclosed. President and CTO Giovanni Barbarossa sold about $16M across two sales in the same window. The company repurchased no stock in fiscal 2026 and has no buyback program, sensible while cash is scarce. In August the board handed CEO Jim Anderson a performance stock award tied to price hurdles over four years: earning nothing below 10% annual appreciation, 50% of target PSUs at $454, full target at $543, and capping at $758 at twice the target, aligning him with a price 60% to 170% above today's.

How it fails or surprises you

The two customers leave or slow. Two buyers each take more than a tenth of revenue, and management warns that because research and factory costs are fixed, a demand drop falls straight through to gross margin. A single hyperscaler pushing 1.6T orders one quarter to the right would cut revenue and margin at once. Watch quarterly revenue against the $2.05B fourth-quarter mark.

The profit is thinner than it looks. Fiscal 2026's $4.12 rested partly on one-time gains: first-quarter net income of $226M came on the year's lowest sales, and cash backed only a dime of each reported dollar. If clean quarterly earnings settle below the beat streak, the 68x trailing multiple reprices. The tell is operating cash flow, $80M last year.

The margin and cash inflection (right tail). If the ramp scales as consensus assumes, revenue jumps 49% to $10.6B and the fixed-cost base works in reverse: gross margin, already 37% from 35%, levers up and free cash flow swings positive. That path puts FY28 near 20x earnings, cheap. The first proof is a quarter where operating cash flow climbs back toward the $600M run rate.

Closing thoughts

You are waiting to find out whether the profit converts to cash. The demand looks real but operating cash flow fell to $80M while the company spent $1.1B building capacity, so the earnings are on the books but not yet in the account. If next year's operating cash flow climbs back toward the $600M it threw off before the boom and eventually covers the capex, the forward multiple is cheap for the growth. If it stays near zero the profit is an accounting artifact and the debt becomes the problem. The upside is fatter while the ramp holds, the forward estimates at 20 to 30 times embed the growth, but the downside is permanent loss because the company is funding expansion with outside capital against $2.1B of net debt, so what matters is survivability, not beats.

The bet is still that the AI datacenters keep buying Coherent's optical parts and the two big customers keep ordering while the company builds fast enough not to run out of cash. What breaks it is one customer slowing or the ramp failing to throw off cash. The pair to watch is next year's operating cash flow against the $1.1B it now spends on plant: until those cross, the growth is rented.