Coherent Stock Slumps. Will AI Spark A Comeback?

Coherent (COHR) stock has declined ~23% YTD despite solid Q3 results, with revenue up 24% to $1.5 billion and adjusted EPS at $0.91, driven by strong demand for AI/ML transceivers, particularly the 800G model, which saw an 80% sequential increase; while COHR's valuation appears slightly cheaper than the S&P 500 based on P/S and P/FCF ratios and revenue growth is strong, profitability remains a concern with lower operating and OCF margins, though margins are expected to improve with increased uptake of high-margin AI products and advanced industrial lasers.

Analysis

Coherent (NYSE:COHR) stock has experienced a significant decline of approximately 23% year-to-date in 2025, attributed to a mixed macroeconomic environment, cautious near-term company guidance, and a broader market rotation from high-growth AI and technology stocks. Despite this sell-off, Coherent's fundamental performance remains robust, with Q3 (fiscal year ending June) revenue increasing 24% year-over-year to $1.5 billion, and adjusted earnings per share improving sharply to $0.91, up $0.53 from the prior year. This outperformance is largely driven by strong demand for its AI/ML-related transceivers, particularly the 800G model, which saw revenues soar nearly 80% sequentially to almost $200 million, positioning Coherent well within the AI sector due to its comprehensive portfolio for high-speed optical data transmission. Valuation metrics suggest COHR stock is relatively inexpensive compared to the broader market, with a price-to-sales ratio of 2.2 versus 3.0 for the S&P 500, and a price-to-free cash flow ratio of 18.9 compared to 20.5 for the S&P 500. Revenue growth has been consistently strong, averaging 22.1% over the last three years and rising 21.7% in the last twelve months to $5.6 billion. However, profitability presents a mixed picture; operating income over the last four quarters was $467 million, translating to an operating margin of 8.4%, below the S&P 500's 13.2%, and operating cash flow margin was 11.9% versus the S&P 500's 14.9%. Nonetheless, margins are anticipated to improve with increased uptake of high-margin products like AI-related transceivers and advanced industrial lasers, supported by an expansion in adjusted gross margins to 38.5% last quarter (a 490 basis point year-over-year increase) and a near-term target of 40%. Additional positive factors include potential growth in its industrial laser business from increasing automation and a diversified global manufacturing footprint, with roughly half of its sites in the U.S., offering insulation from potential tariffs on imported semiconductors.

Key Decisions for Investors

• Investors could consider the current valuation of Coherent as potentially attractive, given its significant revenue growth, strong positioning in the AI transceiver market, and P/S and P/FCF ratios below S&P 500 averages, despite recent stock underperformance.
• Monitor closely the trajectory of Coherent's gross and operating margins, as the company's ability to achieve its targeted 40% gross margin and translate strong AI-related product demand into improved overall profitability is a key catalyst for future stock performance.
• Evaluate Coherent's resilience to macroeconomic headwinds and market rotations, while recognizing its diversified manufacturing base as a potential mitigator against specific geopolitical risks like tariffs, and assess the growth momentum in both its AI and industrial laser segments.