On Thursday, optical communications and photonics technology company Coherent (COHR.US) moved against the market, falling over 3% as of press time. Despite the company's fiscal fourth-quarter 2026 results exceeding market expectations, and a forecast that quarterly revenue will surpass $3 billion by the end of fiscal 2027, driven by sustained robust data center demand and accelerated product supply expansion, the margin improvement failed to fully meet investors' higher expectations. Following the earnings report, multiple Wall Street institutions raised price targets or earnings forecasts for Coherent, generally recognizing the strong growth prospects brought by AI data centers. However, with the increasing share of optical transceiver revenue, the market still harbors some concerns about the potential for gross margin improvement.
Data Center Business Growth Accelerates, 1.6T Products Ramp Up Faster Than Expected
Coherent expects to achieve its first quarter with revenue exceeding $3 billion by the end of fiscal 2027, fueled by rising demand from data center clients and an expanded product portfolio. Jefferies analyst Blayne Curtis noted that Coherent anticipates data center revenue in the September quarter to grow over 80% year-over-year, with optical transceivers remaining the primary growth driver. Among these, 800G products continue to grow, while the ramp-up of 1.6T products is proceeding slightly faster than management anticipated three months ago. This indicates that as AI data centers continuously upgrade high-speed optical interconnect infrastructure, Coherent is further benefiting from the demand surge driven by the technology transition from 800G to 1.6T. However, the company's gross margin guidance is around 40.5%. While this level exceeds the Wall Street consensus, Jefferies believes that, given the company also provided a higher revenue outlook, and competitor Lumentum (LITE.US) previously signaled positive margin trends, this guidance may still fall slightly short of some investors' earlier expectations. Jefferies maintains a "Buy" rating on Coherent and raised its price target from $375 to $420.
Morgan Stanley Significantly Raises Earnings Forecasts
Morgan Stanley maintains an "Equal-weight" rating on Coherent while raising its price target from $330 to $375. Analyst Meta Marshall stated that the gross margin improvement at Coherent is generally similar to the previous quarter, but revenue performance is notably stronger, providing solid support for incremental margins. Meanwhile, the company indicated that there are currently few supply bottlenecks in the expansion of multiple products, with the main constraint being its own indium phosphide (InP) capacity. Morgan Stanley views this information as positive and thus significantly raised its future revenue and earnings per share forecasts for Coherent. However, the firm noted that as optical transceiver sales increase rapidly, the product mix shift may exert some pressure on overall gross margins. Therefore, despite the clearly higher revenue expectations, the path for gross margin improvement has not been upgraded to the same extent. Morgan Stanley raised its fiscal 2027 EPS estimate for Coherent from $8.11 to $9.23.
Bank of America: Good Execution, But Valuation Already Reflects Growth Prospects
Bank of America maintains a "Neutral" rating on Coherent with a $400 price target, while raising its fiscal 2027 and 2028 EPS estimates by 12% and 23%, respectively. Analyst Vivek Arya believes that Coherent is currently executing well on its business strategy. However, compared to peers more focused on optical component businesses, the company's operating leverage on margins is relatively limited, partly due to the same reason that the growth of the optical transceiver business may pressure gross margins. Bank of America also noted that Coherent's future relative growth rate appears less impressive compared to Lumentum. The firm estimates that Lumentum's revenue and EPS compound annual growth rates are approximately 57% and 64%, respectively, while Coherent's are around 32% and 45%. Based on new forecasts, Bank of America applies approximately 27 times the expected 2028 P/E ratio to Coherent, suggesting that the current valuation has already adequately priced in the company's growth potential, so it is not yet turning more bullish.
Earnings Beat Yet Stock Sold Off, Market Focus Shifts to Margins
Coherent's previously reported fiscal fourth-quarter 2026 results actually beat market expectations, with revenue reaching approximately $2.05 billion, about $70 million above the consensus estimate, and adjusted EPS of $1.74, also exceeding expectations. However, against the backdrop of already elevated growth expectations in the AI optical communications sector, investor attention is shifting from pure revenue expansion to whether high growth can translate into higher profitability. The company's 40.5% gross margin guidance, while exceeding the Wall Street consensus, fell short of some investors' more optimistic expectations, becoming a key factor weighing on the stock. Overall, Wall Street remains quite positive about Coherent's data center and AI optical communications growth prospects, particularly favoring the sustained growth of 800G and the accelerated ramp-up of 1.6T products. Nevertheless, as revenue expands rapidly, the impact of the increased share of optical transceiver revenue on gross margins is becoming a critical factor for investors assessing the quality of the company's next phase of earnings growth.
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