Coherent, Inc. (COHR) | The Buildout — AI Infrastructure
The Verdict
Coherent is a vertically integrated photonics company that provides the optical building blocks for AI infrastructure. It designs and manufactures transceivers, indium phosphide lasers, optical circuit switches, and co-packaged optics that move data at high speed inside and between AI data centers. The company’s ability to produce the most supply-constrained component, the indium phosphide laser, in-house gives it a critical advantage during the industry-wide shortage.
| Market Cap | — |
| Revenue (TTM) | $6.6B |
| Revenue Growth | +18.0% |
| EBITDA Margin (TTM) | 16.8% |
| Net Debt | $1.0B |
| Earnings Beats | 7 of 7 |
| P/E (TTM) | — |
| EV/EBITDA (TTM) | — |
What We Like
- Vertically integrated InP laser production: 6-inch wafer yields exceed 3-inch, and capacity is set to quadruple by end-CY2027, securing supply in a constrained market.
- Record demand visibility: orders reach into CY2028 and customer LTAs extend to the end of the decade, providing multi-year revenue certainty.
- NVIDIA strategic partnership with $2B equity investment validates the CPO roadmap and anchors long-term demand across multiple products.
- Multiple growth vectors layering on: OCS market opportunity doubled to >$4B, CPO TAM >$15B, plus multi-rail and thermal solutions expanding the addressable market.
- Fortress balance sheet: $3.0B cash and 0.5x leverage after NVIDIA’s investment funds aggressive capacity expansion without dilution.
What We’re Watching
- InP capacity doubling milestone ~September 2026: any delay would constrain near-term revenue growth.
- Q4 FY2026 gross margin guidance of 39–41%; the pace at which 6-inch cost benefits flow through will determine the path to the >42% long-term target.
- Competitive ramps from AAOI (350% capacity expansion) and Lumentum could pressure pricing if industry supply eventually catches up.
- Apple 3D-sensing multiyear deal was silent in Q3; revenue was expected in 2H CY2026, and the absence leaves an open question.
The thesis is strengthening. Coherent's growth rate is accelerating, demand visibility is unprecedented, and the NVIDIA partnership transforms the CPO opportunity from a concept to a funded growth platform. The key open question is whether the company can execute on its simultaneous InP, OCS, CPO, and new product ramps without margin disappointment.
Earnings Beat
Coherent reported record revenue of $1.8 billion in the March quarter, with non-GAAP gross margin expanding to 39.6%. Datacenter & Communications revenue surged over 40% year-over-year, reflecting strong demand for 800G and 1.6T transceivers and optical switches.
| Metric | Q3 FY2026 | Q2 FY2026 | Q3 FY2025 | YoY |
|---|---|---|---|---|
| Revenue | $1.8B | $1.7B | $1.5B | +20.5% |
| Gross margin | 37.7% | 37.0% | 35.2% | +250bps |
| EBITDA | $193M | $325M | $292M | −33.9% |
| EPS | $1.23 | $0.95 | $0.10 | +1116.1% |
In March, we announced a strategic partnership with NVIDIA focused on multiple CPO‑related products and solutions. This partnership includes both NVIDIA's $2 billion equity investment in Coherent and a multiyear supply agreement extending through the end of the decade.— Jim Anderson, CEO, 2026-05-06
Management tone: Management's tone on the Q3 FY2026 call was confident and direct, with heightened optimism following the NVIDIA partnership closure. The CEO repeatedly cited 'no signs of attenuation' in demand and described the current period as a 'new inflection point' in growth. The CFO emphasized that the 6-inch ramp benefits are still in early stages, maintaining a measured but positive outlook on margin expansion.
Management Guidance
Q4 FY2026 guidance calls for revenue of $1.91–$2.05 billion, non-GAAP gross margin of 39–41%, non-GAAP operating expenses of $360–$380 million, non-GAAP EPS of $1.52–$1.72, and a tax rate of 18–20%. For fiscal 2027, management expects the growth rate to exceed that of fiscal 2026.
Trajectory
Revenue increased to $1.81 billion, a 21% GAAP year-over-year gain (27% pro forma excluding divested businesses), driven by accelerating demand for data center transceivers and optical switches. Gross margin on a GAAP basis rose to 37.7%, up from 35.2% a year earlier, aided by pricing improvements and the early benefits of the 6-inch InP wafer transition.
The Model
The model projects FY+1 revenue of $9,500 million and EBITDA of $2,270 million (23.9% margin), driven by continued InP capacity expansion and ramping 1.6T and CPO volumes. FY+2 revenue rises to $11,850 million with EBITDA of $3,034 million (25.6% margin), reflecting full-year contributions from new products including multi-rail and thermal solutions.
| Metric | FY2025 | Next FY (E) | Following FY (E) |
|---|---|---|---|
| Revenue | $5.8B | $9.5B | $11.8B |
| YoY Growth | — | +63.5% | +24.7% |
| EBITDA | $1.1B | $2.3B | $3.0B |
| EBITDA Margin | 19.0% | 23.9% | 25.6% |
Projections are the median of 5 independent model runs. The model’s revenue sits 9.6% below analyst consensus.
Q4 FY2026 guidance calls for revenue of $1.91–$2.05 billion, non-GAAP gross margin of 39–41%, non-GAAP operating expenses of $360–$380 million, non-GAAP EPS of $1.52–$1.72, and a tax rate of 18–20%. For fiscal 2027, management expects the growth rate to exceed that of fiscal 2026.
What Could Go Right — and Wrong
- New hyperscaler LTAs with upfront co-investments broaden the customer base and validate Coherent's sole-source-like position.
- CPO revenue captures a dominant share of the >$15B addressable market, becoming a primary growth engine.
- Gross margin surpasses 42% earlier than the long-term target as 6-inch InP yields exceed expectations and new product margins improve.
- Multi-rail and thermal solutions achieve rapid commercial adoption, adding multi-billion-dollar revenue streams and diversifying away from transceivers.
- Execution failure at one of the three InP sites delays the 4× capacity ramp, causing revenue to fall short of projections.
- AI capex growth moderates, leading to backlog cancellations and an oversupply that compresses optical component margins.
- Competitor capacity expansions (AAOI 350%, Lumentum) erode pricing power and market share in core transceivers and lasers.
- NVIDIA shifts networking architecture, reducing its CPO commitment and leaving a material revenue gap.
Looking Ahead
Over the next twelve months, Coherent will navigate the completion of its InP capacity doubling and the ramp of multiple new products. The near-term focus is Q4 FY2026 results and the critical InP milestone around September 2026. Into 2027, initial CPO revenue, the Zurich 6-inch site, and the first multi-rail shipments will test the company's ability to execute on its expanded product roadmap.
- ~Sep 2026InP capacity doubling milestone — Validates critical supply unlock; if on time, supports revenue acceleration and margin gains.
- Q4 FY2026 (Aug 2026 report)Q4 FY2026 earnings — Tests guided revenue $1.91–2.05B, gross margin 39–41%, and OCS contribution.
- 2H CY2026Initial scale-out CPO revenue — First shipments of co-packaged optics components confirm roadmap viability.
- Early CY2027Zurich 6-inch InP site production — Second doubling of InP capacity begins; key to sustaining multi-year growth.
- 1H CY2027Multi-rail system initial revenue — Market size at least $2B; pilot orders could validate new platform.
- 2H CY2027Scale-up CPO and thermal solutions — Major volume ramps for CPO and new thermal products; tests diversification.
Financials
Annual Summary
| Metric | FY2025 | TTM |
|---|---|---|
| Revenue | $5.8B | $6.6B |
| Gross Margin | 35.4% | 37.0% |
| EBITDA | $1.1B | $2.1B |
| EBITDA Margin | 19.0% | 16.8% |
| Net Income | $49M | $469M |
| Free Cash Flow | $193M | −$282M |
| Net Cash | — | — |
Key Ratios (Trailing)
- P/E TTM—
- EV/EBITDA TTM—
- EV/Revenue TTM—
- Price/FCF TTM—
- Gross Margin (TTM)37.0%
- EBITDA Margin (TTM)16.8%
- Net Margin (TTM)7.1%
- ROIC4.6%
- FCF Conversion-48.6%
- SBC / Revenue5.2%
The Company
Coherent is a vertically integrated manufacturer of photonic components and systems. Its products — optical transceivers, indium phosphide lasers, optical circuit switches, and co-packaged optics — provide the high-bandwidth, low-latency interconnects essential for scaling AI data centers. The company supplies nearly every major hyperscaler and system OEM, anchored by a strategic partnership with NVIDIA.
The company operates 6-inch indium phosphide wafer fabs in Sherman, Texas, Yarfala, Sweden, and soon Zurich, Switzerland, with a major assembly presence in Malaysia, Vietnam, and China. This vertical integration — from materials to full systems — allows Coherent to control its own supply of the industry's most constrained components, insulating it from the global shortage of InP lasers.
Business Segments
Competitive Landscape
Coherent faces competition across its product lines from other photonic component and laser manufacturers, but its vertical integration and scale in indium phosphide give it a significant supply advantage during the current industry-wide shortage. The company describes demand as 'exceptionally strong with no signs of attenuation' and believes its internal capacity ramp sets it apart from competitors.
- LumentumCompetes in InP lasers, transceivers, CPO lasers, and OCS; also a reciprocal supplier/customer with Coherent.
- Rapidly expanding 800G/1.6T transceiver and laser capacity by 350%, targeting $471M/month in transceiver revenue by mid-2027.
- Leader in CPO solutions at the switch-ASIC level; potential competitor or partner depending on system design.
- Fiber lasers for industrial applications; minimal overlap with Coherent's AI optical business.
- MKS InstrumentsPhotonics and lasers, specialty optics; limited direct overlap.
Supply Chain
Coherent sits at the intersection of optical component supply and AI demand, controlling the most bottlenecked material — indium phosphide lasers — while relying on foundries for silicon photonics and substrate suppliers for raw wafers.