Concerns about "光模块巨头" Coherent falling behind are alleviated with key AI client CPO large orders?

In the latest earnings season, Coherent strongly countered market concerns about potentially "falling behind" in the AI optical communication race with better-than-expected performance and extremely strong order guidance. This optical communication giant not only demonstrated a comprehensive acceleration in growth but also reestablished its position as a technology leader with minimal product portfolio gaps by securing orders from key AI customers.

As a result, Wall Street investment banks have raised their target prices for Coherent. JP Morgan significantly raised its target price from $215 to $245 and maintained an "overweight" rating, citing that the company is in a period of accelerated growth driven by strong demand across its entire product line and capacity ramp-up. Morgan Stanley maintained a "neutral" rating but acknowledged a significant improvement in order visibility, raising its target price from $190 to $200. The market generally believes that with the continued hot spending on AI data centers, Coherent is entering a new profit growth cycle.

The latest financial data shows that Coherent recorded revenue of $1.686 billion and earnings per share (EPS) of $1.29 for the second quarter of fiscal year 2026 (ending in December), both exceeding Wall Street expectations. More critically, the order shipment ratio for the company's data center products exceeded 4 times, and management revealed that the capacity for the calendar year 2026 has basically been "fully booked," with orders for 2027 also being rapidly filled. This "supply-demand imbalance" has directly dispelled investors' concerns about its market share loss.

Despite the impressive revenue performance, the speed of margin expansion remains a focal point for the market. Morgan Stanley pointed out that while demand is extremely strong, Coherent's performance on gross margin only met expectations and did not fully benefit from the pricing bonuses brought about by supply tightness, unlike some competitors. However, with the company's internal indium phosphide (InP) capacity doubling and the increasing shipment proportion of higher-end products (such as 1.6T optical modules), institutions generally expect its profitability to further enhance in the coming quarters.

Surge in Demand and Capacity "Arms Race"

The core highlight of this earnings report is the unprecedented clarity of order visibility. According to JP Morgan's report, Coherent's data center products recorded an order shipment ratio exceeding 4 times at the end of the second quarter, primarily due to strong demand for 800G and 1.6T optical modules. Management clearly stated that most of the capacity for the calendar year 2026 has been booked, and the capacity for 2027 is also being rapidly filled. This demand is not limited to transceivers but extends to data center interconnect (DCI) products and optical circuit switching (OCS) systems, the latter currently having participation from over 10 customers, with a potential market size exceeding $2 billion In response to this explosive demand, Coherent is undergoing aggressive capacity expansion. The company is on track to double its indium phosphide (InP) capacity internally, having already completed 80% of its wafer production target. Additionally, the company is increasing capacity in Malaysia and Vietnam to support the delivery of orders for transceivers and their supply chain components. JP Morgan analysts believe that as capacity bottlenecks ease, the revenue growth rate of the data center business is expected to accelerate further from 14% in the second quarter.

CPO Large Order Establishes Technical Leadership

In addition to the ramp-up of traditional optical modules, Coherent's breakthroughs in next-generation technology have also injected confidence into the market. According to JP Morgan, Coherent announced that it has secured a major order for co-packaged optics (CPO) solutions, which includes providing high-power lasers to a certain AI data center customer.

This development is strategically significant, as it not only demonstrates Coherent's strength in the CPO field but also alleviates investor concerns about its technological lag. JP Morgan pointed out that, combined with recent shipments of EML and silicon photonic transceivers, as well as the ramp-up of VSCELs in the second half of the year, these further confirm that Coherent is a technology leader with very few product portfolio gaps. Morgan Stanley also mentioned that the company has secured a large procurement order for CPO, which is expected to start contributing revenue by the end of the 2026 calendar year and become more substantial in 2027.

Performance Exceeds Expectations and Guidance Upgraded

From the specific financial data, Coherent delivered a solid report card. In the second quarter of fiscal year 2026, the company achieved revenue of $1.686 billion, exceeding JP Morgan's expectation of $1.630 billion and the market consensus of $1.641 billion; adjusted EPS was $1.29, also higher than the expected $1.22. The communications business grew by 44% year-on-year, while the data center business grew by 36% year-on-year.

Based on strong orders on hand, Coherent has upgraded its performance guidance for the third quarter. The company expects revenue to be between $1.70 billion and $1.84 billion, with EPS between $1.28 and $1.48, all above previous market expectations.

As a result, JP Morgan has raised its revenue growth expectations for the company for fiscal years 2026 and 2027, from a growth rate in the teens to nearly 20% and over 20%, respectively, and expects the earnings per share for the 2027 calendar year to exceed $8.

Profit Margin Concerns and Valuation Logic

Despite the promising revenue and order situation, there are some concerns regarding profit margins. Morgan Stanley pointed out in its report that despite having an order shipment ratio of over 4 times and an extremely tight market environment, Coherent's gross margin guidance is somewhat disappointing. Compared to competitors who can achieve higher margin expansion through pricing power, Coherent seems not to have fully benefited from this supply-demand imbalance. The gross margin for the second quarter was 39.0%, which only met expectations and did not bring any surprises. However, JP Morgan holds a more optimistic view. The bank expects that with the ramp-up of the higher-margin 1.6T products and the improvement in capacity utilization, the company's gross margin will exceed the 40% threshold in the second half of 2026.

In terms of valuation, JP Morgan assigns a price-to-earnings ratio of 30 times to Coherent based on the expected EPS for 2027, believing it should enjoy a premium as a beneficiary of AI data center investments, setting a target price of $245. Morgan Stanley, on the other hand, is relatively cautious, giving a price-to-earnings ratio of 28 times and a target price of $200, believing that while the long-term growth story is intact, short-term profit margin realization still needs to be observed