Strong AI demand fails to mask weakness in non-core businesses. Corning Inc (GLW.US) reported mixed Q3 results, and Wall Street says further stock upside still requires substantive margin improvement.

Corning Inc (GLW.US) recently released its fiscal 2026 third-quarter earnings report. Although the company's total revenue and earnings per share (EPS) both exceeded Wall Street expectations, the fourth-quarter guidance it provided was somewhat lackluster due to weak performance in non-core businesses such as CECEP Solar Energy and consumer electronics. Combined with market concerns about the sustainability of AI infrastructure spending, Corning Inc's stock price closed down about 1% that day. In response, both Morgan Stanley and Bernstein said that Corning Inc's Q3 optical communications business performed strongly and AI-related demand was robust, but both maintained a "Neutral" rating, jointly noting that losses in the CECEP Solar Energy business dragged on results, consumer end-demand was weak, and factors such as variable compensation suppressed short-term margins. Further stock upside requires substantive margin improvement. Morgan Stanley believes the core catalysts fall more in the second half of 2027, when optical communications scale up and pressure on the CECEP Solar Energy business fades, and that the target price cut stems from overall valuation compression in the AI sector; Bernstein is cautious about the company's long-term growth targets, believing that the positive factors from optical communications have already been largely reflected in the stock price, while also flagging that Q4 guidance is weak, though it also believes that if sentiment in the AI sector weakens, Corning Inc's downside risk is relatively limited. Optical communications becomes the sole bright spot, with growth driven by enterprise and AI demand The earnings report shows that Corning Inc's third-quarter total revenue reached US$5.081 billion, above the market consensus expectation of US$5.019 billion; adjusted earnings per share were US$0.91, also exceeding the market expectation of US$0.88. However, behind this seemingly strong report card, the DRIVE behind the earnings beat came almost entirely from the strong performance of the Optical Communications business, while other business segments generally fell short of expectations. As Corning Inc's core growth engine, the optical communications business achieved third-quarter revenue of US$2.379 billion, far exceeding the market expectation of US$2.224 billion. Revenue for this business grew 44% year over year, of which Enterprise grew as much as 84%, Gen AI-related sales more than doubled, and Carrier business grew 4% year over year. It is worth noting that the incremental revenue of the optical communications business is accelerating, with a quarter-over-quarter increment of about US$300 million in the third quarter, significantly higher than US$225 million in the second quarter and US$150 million in the first quarter, which confirms the company's ability to achieve the 19% compound annual growth rate (CAGR) target in its 20-30-40 long-term growth framework. In addition, the business's margin performance was also strong, reaching 22.4%, above the market expectation of 21.3% and Bernstein's expectation of 20.5%. Morgan Stanley noted in a report that Corning Inc is effectively using long-term customer agreements to support its capacity expansion. Currently, most growth-related capital expenditures are supported by long-term customer agreements, and customer prepayments provide funding for capacity construction. Year to date, customer deposits have contributed US$639 million to operating cash flow, supporting more than US$2 billion in free cash flow. Morgan Stanley believes this model is an important risk-mitigation mechanism during the capacity ramp-up phase of the Springboard plan, especially against the backdrop of accelerating optical communications capacity investment. CECEP Solar Energy and consumer electronics businesses remain under pressure, variable compensation suppresses margins In sharp contrast to the strength of the optical communications business, Corning Inc's other business segments generally performed weakly in the third quarter. The CECEP Solar Energy (Solar) business had revenue of US$436 million, up 37% year over year but essentially flat quarter over quarter, far below the market expectation of US$501 million, and the segment recorded a net loss of US$7 million. Corning Inc management explained that this was mainly due to slower-than-expected ramp-up of wafer and module capacity, but market demand remains strong. Morgan Stanley noted that CECEP Solar Energy's production costs remain a drag, and although the recent Section 232 trade bill improved the pricing environment, slow productivity improvement limits near-term earnings upside, with margins expected to improve gradually in 2027. Glass Innovations business revenue fell 3% year over year to US$1.51 billion, and net profit fell 10% year over year, mainly constrained by rising memory prices squeezing the consumer electronics market. Among them, TV sales fell 4%, and notebook and handheld device sales fell about 20%. Although Corning Inc continues to outperform the end market by increasing content per device, Morgan Stanley believes that in an environment of weak consumer demand, near-term upside is limited, and the recently announced display price increases are expected to bring substantive benefits only in 2027. Automotive business revenue was US$470 million, slightly above expectations, but its 14.3% margin was below the market expectation of 17%. In addition, Morgan Stanley specifically mentioned that variable compensation expenses remained above normal levels in the third quarter, consistent with the high spending in the second quarter. Although management expects these costs to stabilize in the fourth quarter and reset in 2027, they are still suppressing margins in non-optical communications businesses and limiting near-term operating leverage. Q4 guidance falls short of some institutions' expectations, with 2027 seen as a key catalyst window Corning Inc expects fourth-quarter revenue of between US$5.2 billion and US$5.3 billion, and earnings per share of between US$0.96 and US$1.00. This revenue guidance is below Bernstein's previous expectation of US$5.4 billion, but the EPS guidance is above the market consensus of US$0.93. The company did not update its long-term growth framework or provide incremental guidance for 2027. Based on the latest earnings report, Morgan Stanley raised Corning Inc's fiscal 2026 core revenue forecast to US$19.4 billion and its EPS forecast to US$3.37; it raised its fiscal 2027 revenue forecast to US$23.2 billion and its EPS forecast to US$4.37. However, despite raising earnings forecasts, Morgan Stanley still cut its target price from US$165 to US$155 and lowered its base-case valuation multiple from 30x to about 28x (based on fiscal 2028 EPS of about US$5.60). Morgan Stanley explained that this reflects the overall compression of valuation multiples for AI-related names and a more balanced market backdrop recently. Morgan Stanley believes that although accelerating enterprise demand and continued capacity expansion support a premium valuation, there are limited near-term catalysts for valuation expansion, and the bigger catalysts may not appear until 2027, when optical communications demand growth will be clearer and the negative factors from CECEP Solar Energy will fade. Bernstein set a target price of US$140 (based on 25x the fiscal 2028 EPS of US$5.7). The firm said Corning Inc's long-term growth framework is relatively aggressive, and its model forecasts the company's 2028 revenue will reach US$28 billion, slightly below the level implied by the company's growth framework and the market consensus. However, Bernstein also acknowledged that Corning Inc has substantial room for content growth in the AI accelerator space, and its model forecasts a 51% compound annual growth rate in enterprise optical communications revenue from 2026 to 2028, while automotive and Glass Innovations businesses remain growth drags.