Coherent is transforming into the “plumbing of AI”—leveraging vertically integrated InP optics to ride the 800G→1.6T datacenter supercycle while deleveraging and pruning legacy low-margin assets.
Overview
Coherent (COHR) is in the midst of a high-stakes transformation from a post-merger photonics conglomerate into a streamlined infrastructure supplier for the AI era. Following the II-VI and legacy Coherent merger and several years of integration and inventory normalization, the company is now showing “proof point” execution: FY25 revenue reached a record $5.81B (+23% YoY), driven predominantly by the Networking segment, which is benefiting from a secular supercycle in high-speed optics for hyperscale AI clusters. Under CEO Jim Anderson (appointed June 2024), Coherent is executing an operational playbook focused on gross margin expansion, rapid debt reduction, and divestiture of lower-margin assets. Results include non-GAAP gross margin expansion (34.3%→37.9% in FY25; 38.7% in Q1 FY26), strong operating leverage (FY25 non-GAAP EPS $3.53 vs $1.21 in FY24), and a growing pattern of earnings beats in FY26. The thesis is bifurcated: explosive AI datacenter demand for 800G/1.6T transceivers reshaping revenue mix and margins, balanced by a legacy Lasers/Materials portfolio that is cyclical today but provides cash flow and rebound leverage. Key risks include China/geopolitics (Huawei/BIS inquiry, material export controls, tariffs), customer concentration among hyperscalers, a potential technology shift to co-packaged optics, and balance-sheet leverage from the 2022 deal. Even so, the market is increasingly rewarding Coherent’s deleveraging and operational discipline as it repositions from a “show-me” integration story into a core holding for investors seeking exposure to the physical infrastructure behind AI.