Coherent delivers 41% growth as AI networking reshapes optical sector

Coherent's transformation from a cyclical hardware supplier into a structural AI infrastructure play is reshaping how investors value optical networking companies.

Coherent Corp.'s Datacenter & Communications segment surged 41% year over year to account for 75% of fiscal third-quarter revenue, as hyperscale cloud providers locked in long-term optical networking commitments tied to AI infrastructure buildouts.

"The visibility we now have into customer demand extends through calendar 2028, with long-term supply agreements stretching to 2030," Coherent management said on the earnings call, highlighting a structural shift away from the short product cycles that have historically defined hardware businesses.

The company invested roughly $290 million in capital expenditures during the quarter, more than double the prior-year period, to expand production capacity for high-speed optical transceivers and photonic components. Adjusted operating margins expanded 163 basis points on higher factory utilization, while adjusted net income rose nearly 56 percent year over year.

Coherent trades at 36.5 times forward earnings, below its five-year median of 39.2 times, even as analysts project 22 percent revenue growth and 55 percent EPS growth for fiscal 2026. The valuation discount relative to peers suggests the market has yet to fully price in the durability of AI-driven optical demand.

Why Optical Networking Became an AI Bottleneck

AI clusters rely on thousands of accelerators working in parallel, creating massive data transfer requirements between GPUs. Optical transceivers and photonic interconnects have become the critical link — without them, compute performance stalls regardless of how many chips are deployed. Coherent's product portfolio, spanning 800G and emerging 1.6T optical modules, positions it directly in this bottleneck.

The company's record backlog now extends into calendar 2028, with customers making multi-year commitments rather than placing quarterly orders. This marks a departure from the traditional hardware procurement cycle, where demand fluctuated with data center refresh rates. Coherent's manufacturing expansion is backed by contractual customer commitments rather than speculative demand forecasts, reducing the risk of overcapacity during an economic slowdown.

How Coherent Stacks Up Against Peers

Among optical networking peers, Coherent has pulled ahead on growth visibility and production scale. Lumentum Holdings and Fabrinet are also benefiting from data center upgrades, but Coherent's broader exposure to AI-specific infrastructure investments and its aggressive capacity expansion give it a competitive edge.

Arm Holdings, another AI infrastructure beneficiary, trades at 120.7 times forward earnings — more than three times Coherent's multiple — with EPS growth expected at 19 percent this year, compared with Coherent's 55 percent. While Arm's processor architecture enjoys a powerful ecosystem moat, its premium valuation leaves less room for upside. Coherent offers a stronger balance of growth, visibility and valuation, according to Zacks data.

For investors, the question is whether Coherent's expanding margins and record backlog can sustain the current trajectory. With AI infrastructure spending expected to remain a strategic priority for cloud providers and enterprise customers, the company's growing exposure to this structural trend could support more durable revenue growth. Coherent's ability to convert rising production volumes into expanding margins — adjusted operating margins improved 163 basis points in the latest quarter — suggests the operating leverage story is still in its early innings.

This article is for informational purposes only and does not constitute investment advice.