Coherent (COHR.US) fell more than 3% after earnings as strong demand in data centers drove accelerated revenue growth. Wall Street raised its target price, but concerns arose regarding profit margin performance.

On Thursday, Coherent (COHR.US), a company specializing in optical communications and photonic technology, saw its stock decline over 3% despite the market's overall performance. Although the company's fourth-quarter results for fiscal year 2026 exceeded market expectations, and it is anticipated that quarterly revenue will surpass $3 billion before the end of fiscal year 2027 due to sustained demand in data centers and accelerated expansion of product supply, the degree of improvement in profit margins did not fully meet investors' high expectations. Following the earnings report, several Wall Street firms raised their target prices or earnings forecasts for Coherent, generally acknowledging the strong growth outlook presented by AI data centers. However, as the proportion of revenue from optical transceiver business increases, there remain concerns in the market regarding the company's potential for margin improvement. Rapid Growth in Data Center Business; 1.6T Product Rollout Faster than Expected Coherent expects to achieve its first quarterly revenue exceeding $3 billion before the end of fiscal year 2027, driven by ongoing growth in demand from data center customers and the company's expansion of product offerings. Analyst Blayne Curtis from Jefferies Financial Group Inc. noted that Coherent anticipates a year-on-year growth rate exceeding 80% for data center business revenue in the September quarter, with optical transceivers remaining the primary driver of growth. The 800G products continue to see growth, while the rollout of 1.6T products is slightly faster than the management's three-month-old expectations. This suggests that as AI data centers continue to upgrade their high-speed optical interconnect infrastructure, Coherent is further benefiting from the increase in demand driven by the transition from 800G to 1.6T technology. However, the companys guidance for gross margin is around 40.5%. While this level is higher than Wall Street's general expectations, Jefferies Financial Group Inc. believes that considering the company has also provided a higher revenue forecast, coupled with a positive margin signal released by competitor Lumentum (LITE.US) earlier, this guidance may still be slightly below some investors' previous expectations. Jefferies Financial Group Inc. continues to give Coherent a Buy rating and raised its target price from $375 to $420. Morgan Stanley Significantly Raises Earnings Forecast Morgan Stanley maintains a Hold rating on Coherent and raised its target price from $330 to $375. Analyst Meta Marshall stated that Coherent's improvement in gross margin is consistent with the previous quarter, but the revenue performance is significantly stronger, providing good support for incremental profit margins. Meanwhile, the company indicated that there are currently not too many supply bottlenecks in the expansion of multiple products, with the main limiting factor being its own indium phosphide (InP) capacity. Morgan Stanley views this information positively and has therefore significantly upgraded its future revenue and earnings per share forecasts for Coherent. However, the firm pointed out that as the sales volume of optical transceivers increases rapidly, changes in product structure may pose some drag on overall gross margin. Thus, despite a noticeable increase in revenue expectations, the path for margin improvement has not seen a proportional upward adjustment. Morgan Stanley raised its earnings per share forecast for Coherent in fiscal year 2027 from $8.11 to $9.23. Bank of America Corp: Good Execution, but Valuation Reflects Growth Prospects Bank of America Corp maintains a Neutral rating on Coherent with a target price of $400, while also raising its earnings per share forecasts for 2027 and 2028 by 12% and 23%, respectively. Analyst Vivek Arya from Bank of America Corp believes that Coherent is currently performing well in executing its business strategy, but the companys operating leverage on margins is relatively limited compared to peers that are more focused on optical components, one reason being that the growth of the optical transceiver business may exert pressure on gross margins. Bank of America Corp also pointed out that compared to Lumentum, Coherent's future relative growth rate appears somewhat lacking. The firm anticipates Lumentums revenue and earnings per share compound growth rates to be approximately 57% and 64%, respectively, while Coherent's are around 32% and 45%. Based on the new forecasts, Bank of America Corp assigns Coherent an expected price-to-earnings ratio of about 27 times for 2028, believing that the current valuation has sufficiently reflected the company's growth potential and thus has not turned more bullish. Despite Earnings Exceeding Expectations, Selling Pressure Increases; Market Focus Shifts to Margins Coherent's previously announced fiscal year 2026 fourth-quarter results actually surpassed market expectations, with revenue reaching approximately $2.05 billion, about $70 million higher than market expectations; adjusted earnings per share were $1.74, also above market forecasts. However, amid already high growth expectations for the AI optical communication sector, investor focus is gradually shifting from mere revenue expansion to whether the rapid growth can be simultaneously translated into higher profitability. Although the companys guidance of a 40.5% gross margin exceeded Wall Street expectations, it did not meet some investors' more optimistic expectations, becoming one of the significant factors putting pressure on the stock price. Overall, Wall Street remains relatively optimistic about Coherent's growth prospects in data centers and AI optical communications, particularly favoring the continued growth of 800G and the accelerated rollout of 1.6T products. However, along with the rapid expansion of revenue, the impact of an increased proportion of optical transceiver business on gross margins is becoming a key factor for investors assessing the quality of the company's next phase of profit growth.