Coherent: Strong AI demand prompts upgrade of target price to $330.

Overview

Morgan Stanley has issued a research report, reaffirming its “Equal-weight” rating on Coherent Corp (COHR) and raising the target price from $290 to $330. The report notes that the company is proceeding as planned with its capacity expansion, with particularly strong performance in AI‑related optical communications. Although the pace of near‑term gross margin improvement is slightly below the market’s more aggressive expectations, which could lead to stock price volatility, in the longer term, as InP capacity comes online and new products such as OCS/CPO contribute, the company’s profitability is expected to improve significantly. Should the stock experience a double‑digit pullback, the firm views this as a buying opportunity.

Core views

Performance and Growth Drivers: In its fiscal third quarter (FQ3) of 2026, Coherent delivered robust revenue growth. Revenue reached $1.806 billion, up 20.5% year over year and 7.1% sequentially, with the pace of expansion accelerating markedly from the prior quarter. This growth was primarily driven by the Data Center & Communications segment, which posted a substantial 41% year-over-year increase in revenue. Management views June as a “new inflection point” for revenue growth, underpinned by strong market demand and improved supply capacity. Capacity Expansion and Supply Chain Advantages: The research report highlights the company’s progress in expanding InP (indium phosphide) production capacity. InP has been a key industry bottleneck, yet Coherent expects to double its InP capacity by year-end—quarter ahead of schedule. Moreover, the company has encountered no significant capacity constraints in scaling other businesses, such as OCS (Optical Circuit Switching), setting it apart from some peers and underscoring its strong execution capabilities. Profit Margins and Earnings Outlook: Despite strong revenue growth, margin improvement lagged slightly behind investors’ more optimistic expectations. Non-GAAP gross margin for FQ3 stood at 39.6%, up 60 basis points sequentially and 105 basis points year over year. This expansion stemmed largely from the ramp-up of 6-inch InP production, yield improvements, and pricing optimization; however, as these initiatives remain in their early stages and external laser‑procurement costs have risen, gross margin did not experience a step‑change uptick. Leveraging the incremental revenue from capacity release, Morgan Stanley raised its earnings forecast: fiscal 2027 revenue is now projected at $9.46 billion, up from $8.73 billion, and non‑GAAP EPS is raised to $8.14, from $7.47. Valuation and Rating Rationale: The firm maintains an “Equal-weight” rating but raises the price target to $330. This target implies an estimated fiscal 2028 EPS of approximately $11.50, implying a P/E multiple of roughly 28–30x. This multiple exceeds the historical average, reflecting a premium for the company’s AI exposure. The report notes that the stock has already advanced by more than 50% over the past three months and may face near‑term pressure as the market digests margin dynamics; however, if the share price were to pull back by a double‑digit percentage, it would present an attractive buying opportunity.

Analysis framework

This research report employs a typical analytical framework of “fundamental validation + valuation re‑estimation.” First, analysts compare actual results with market consensus and ModelWare estimates, identifying a divergence: revenue exceeds expectations, while gross margins align with guidance but fall short of the implied high-end consensus. This discrepancy helps explain why the stock may face near-term consolidation. Second, the analysis shifts focus from raw financial figures to operational metrics, particularly the ramp-up of InP capacity and the unconstrained expansion of OCS. These are key supply‑side factors determining whether the company can capitalize on AI opportunities. By confirming the achievement of these operational milestones, analysts bolster confidence in an acceleration of future revenue growth. Finally, at the valuation level, analysts apply a forward P/E approach, factoring in an adjusted 2028 EPS estimate of approximately $11.5 and assigning a premium multiple of 28–30x for AI‑related segments to derive a new target price. Additionally, scenario analysis—covering bear, bull, and base cases—provides a range of valuations under different execution outcomes, enabling investors to assess the risk‑return profile.

Methodology notes

• Valuation MethodologyPE/PEG valuation

  Forward Price-to-Earnings Ratio Valuation Method

  The research report calculates the target price by multiplying the projected earnings per share (EPS) for fiscal year 2028 by a specific price-to-earnings (P/E) multiple—typically in the range of 28 to 30. This approach is commonly applied to growth-oriented technology stocks, assessing current valuation by anchoring on their earnings potential over the coming years. The level of the P/E multiple reflects a premium or discount based on the degree of certainty surrounding growth prospects, such as those driven by AI trends.

• Industry/ Sector Analysis FrameworkSupply-and-Demand Framework

  Analysis of Capacity Bottlenecks and Supply Elasticity

  In the optical communications industry, InP (indium phosphide) substrates represent a critical raw-material bottleneck. This research report assesses whether Coherent can overcome this supply constraint—by doubling its production capacity and eliminating other bottlenecks—to determine whether it can translate market demand into tangible revenue and market share. This constitutes a key lens for evaluating the core competitive strengths of hardware‑manufacturing companies.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Coherent Corp (COHR.US)

  Core target: Benefiting from the surge in optical communication demand driven by AI data center construction, as well as a rising market share attributable to its expanded InP production capacity.

  Strengths

  Data center revenue posted robust growth (+41% year-on-year); InP capacity expansion is progressing faster than planned; emerging businesses such as OCS face no capacity constraints; and the customer base remains diversified.

  Weaknesses

  Gross margin improvement has been slower than that of some peers and below investors’ more aggressive expectations; industrial-segment revenue continues to decline; the company remains reliant on procuring certain lasers from external suppliers, which is putting upward pressure on costs.

  Comparison

  Compared with its peers, Coherent has demonstrated stronger execution in expanding its OCS capacity—no bottlenecks have been observed—though its progress in improving gross margins has been somewhat slower.

  Risks

  Valuation correction in the AI ecosystem; supply constraints for EMLs (Electro-Absorption Modulated Lasers); macroeconomic headwinds or tariff-related impacts on pricing; and intensifying competition driving price pressures.

Key data

• FQ3 RevenueUS$1.806 billionYear-on-year growth was 20.5%, while month-on-month growth stood at 7.1%, both exceeding expectations.
• Revenue growth rate of the data center and communications businesses+41%A substantial year-on-year increase, driven primarily by…
• Non-GAAP gross margin39.6%A month-over-month increase of 60 bps and a year-over-year increase of 105 bps.
• Fiscal Year 2027 Revenue Forecast (New)US$9.46 billionThe previous estimate was US$8.73 billion.
• Fiscal 2027 Non-GAAP EPS Guidance (New)US$8.14The previous estimate was $7.47.
• Target priceUSD 330Raised from $290, implying an upside of approximately 4.3% (based on the current price of $344.67).

Impact & implications

For Coherent, this report reaffirms its position as a beneficiary of the AI infrastructure boom, particularly in optical modules and interconnect solutions. The smooth expansion of production capacity enables the company to take on a growing volume of AI‑related orders, driving accelerated revenue growth over the coming quarters. However, the gradual improvement in gross margins suggests to investors that a significant margin breakout may take longer to materialize, or may depend on increasing the share of internally manufactured components—such as 6‑inch InP wafers—at the expense of external sourcing. From an industry perspective, Coherent’s unconstrained expansion in the OCS space is likely to intensify competition, while also validating the viability of this technology pathway.

Risks

• AI infrastructure development has been paused or slowed, potentially spurred by events such as the DeepSeek incident.
• The overall valuation of the AI ecosystem has undergone a turning point, triggering a pullback in the sector.
• Key components, such as EMLs (electro-absorption modulated lasers), are facing supply constraints.
• Macroeconomic headwinds and tariff policies have made price hikes challenging, thereby weighing on gross margins.
• Competitive pressures in the data communications sector have intensified.
• The SiC (silicon carbide) market is highly competitive.

What to watch

• The actual contribution of InP capacity ramp-up progress and the increased share of 6-inch wafers to gross margin.
• The ramp-up in demand for OCS (Optical Circuit Switching) and CPO (Co-Packaged Optics) products.
• Signs of improvement in semiconductor capital equipment orders in the industrial sector.
• Whether the gross margin in subsequent quarters can move toward the target of over 42%.
• The pace of decline in net interest expense (the deleveraging effect).