Coherent has strongly countered market concerns about potentially lagging in the AI optical communication race with better-than-expected quarterly results and a robust order outlook. The optical communications leader not only demonstrated broadly accelerating growth but also reaffirmed its position as a technology leader with minimal product portfolio gaps by securing orders from key AI customers.
Prompted by these results, Wall Street investment banks have raised their price targets for Coherent. J.P. Morgan significantly increased its target from $215 to $245, maintaining an "Overweight" rating, citing the company's position in a period of accelerated growth driven by strong demand across all product lines and rising capacity utilization. Although Morgan Stanley maintained an "Equal-weight" rating, it acknowledged significantly improved order visibility and raised its target from $190 to $200. The market widely believes that with sustained strong spending on AI data centers, Coherent is entering a new cycle of profit growth.
The latest financial data shows that for the second quarter of fiscal year 2026 (ended December), Coherent reported revenue of $1.686 billion and earnings per share (EPS) of $1.29, both exceeding Wall Street expectations. More critically, the book-to-bill ratio for the company's data center products exceeded 4:1. Management indicated that capacity for the full 2026 calendar year is essentially "fully booked," and orders for 2027 are being filled rapidly. This supply-demand imbalance directly dispels investor concerns about market share loss.
Despite the impressive revenue performance, the pace of margin expansion remains a key market focus. Morgan Stanley noted that while demand is exceptionally strong, Coherent's gross margin performance only met expectations and did not fully capture the pricing benefits from tight supply, unlike some competitors. However, with the planned doubling of internal indium phosphide (InP) production capacity and an increasing shipment mix of higher-end products (such as 1.6T optical modules), institutions generally expect its profitability to strengthen further in the coming quarters.
**Demand Surge and Capacity "Arms Race"** The core highlight of the earnings report is the unprecedented clarity in order visibility. According to a J.P. Morgan report, Coherent's data center products achieved a book-to-bill ratio exceeding 4:1 at the end of the second quarter, primarily driven by robust demand for 800G and 1.6T optical modules. Management clearly stated that most of the 2026 calendar year capacity is already booked, and 2027 capacity is filling up quickly. This demand extends beyond transceivers to include Data Center Interconnect (DCI) products and Optical Circuit Switch (OCS) systems, the latter now involving engagement with over 10 customers and representing a total addressable market exceeding $2 billion.
To meet this explosive demand, Coherent is undertaking aggressive capacity expansion. The company is on track to double its internal InP capacity, having already achieved 80% of its wafer start target. Additionally, the company is adding capacity in Malaysia and Vietnam to support orders for transceivers and related supply chain components. J.P. Morgan analysts believe that as capacity bottlenecks ease, the quarter-over-quarter revenue growth rate for the data center business could accelerate further from the 14% seen in the second quarter.
**Major CPO Order Solidifies Technology Leadership** Beyond volume growth in traditional optical modules, Coherent's breakthrough in next-generation technology has boosted market confidence. J.P. Morgan revealed that Coherent announced a significant major order for a Co-Packaged Optics (CPO) solution, which includes supplying high-power lasers to an AI data center customer.
This development is highly strategic. It not only proves Coherent's capabilities in the CPO field but also quiets investor concerns about its technology roadmap being behind. J.P. Morgan pointed out that, combined with recent shipments of EML and silicon photonics transceivers and the upcoming volume ramp of VCSELs in the second half of the year, these factors reaffirm Coherent as a technology leader with very few gaps in its product portfolio. Morgan Stanley also mentioned that the company secured a substantial purchase order for CPO, expected to begin contributing to revenue by the end of the 2026 calendar year and become more significant in 2027.
**Earnings Beat and Guidance Raise** In terms of specific financial data, Coherent delivered solid results. For the second quarter of fiscal 2026, the company achieved revenue of $1.686 billion, surpassing J.P. Morgan's expectation of $1.630 billion and the market consensus of $1.641 billion. Adjusted EPS was $1.29, also beating the expected $1.22. The Communications segment grew 44% year-over-year, while the Data Center segment grew 36% year-over-year.
Based on its strong order backlog, Coherent raised its guidance for the third quarter. The company expects revenue between $1.70 billion and $1.84 billion and EPS between $1.28 and $1.48, both above prior market expectations.
Consequently, J.P. Morgan raised its revenue growth expectations for fiscal years 2026 and 2027 from growth in the teens to nearly 20% and over 20%, respectively, and expects calendar year 2027 EPS to exceed $8.
**Margin Concerns and Valuation Rationale** Despite the positive revenue and order trends, there are slight concerns regarding margins. Morgan Stanley noted in its report that despite a book-to-bill ratio exceeding 4:1 and an extremely tight market environment, Coherent's gross margin guidance was somewhat disappointing. Compared to competitors who are achieving greater margin expansion through pricing power, Coherent does not yet seem to be fully benefiting from this supply-demand imbalance. The second-quarter gross margin was 39.0%, merely meeting expectations without providing a positive surprise.
However, J.P. Morgan holds a more optimistic view. The bank expects that with the volume ramp of higher-margin 1.6T products and improved capacity utilization, the company's gross margin will break through the 40% threshold in the second half of 2026.
Regarding valuation, J.P. Morgan applies a price-to-earnings (P/E) multiple of 30 times its projected 2027 calendar year EPS to Coherent, arguing it deserves a premium as a beneficiary of AI data center investment, setting a $245 price target. Morgan Stanley is relatively more cautious, applying a 28x P/E multiple and a $200 target, believing that while the long-term growth story is intact, short-term margin execution still needs to be monitored.
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