Coherent (NYSE:COHR) is a major manufacturer of networking, laser and optical equipment. Like many businesses with a foot in the networking world, Coherent has been rising steadily on demand from the growth of AI infrastructure.
Shares of COHR are up over 22 percent in the past year, and it appears that they could still have more room to run as the business keeps scaling up.
How high could Coherent stock go, and does COHR look like a buy for long-term investors today?
Coherent’s Growth Opportunity and Guidance
Despite being a well-established business that has been around since the 1970s, Coherent is likely in for a period of very strong growth ahead. It has been rapidly innovating to improve its transceivers in order to support the quickly growing networking needs of AI data centers.
This, in conjunction with other market opportunities, has led management to issue guidance of 22 percent revenue growth in FY2025. Adjusted EPS, meanwhile, is projected to nearly triple during the current fiscal year.
In the most recent quarter, Coherent took a major step forward by becoming an innovation partner with NVIDIA. The two businesses hope to work together to create advanced networking switches that will meet the growing demands of AI infrastructure.
A partnership with NVIDIA puts Coherent in a very strong position on the networking side of the AI boom, potentially opening up years of future growth as more and more data centers are constructed using NVIDIA’s hardware.
How Is Coherent Doing Now?
So far, Coherent seems to be delivering on management’s sharply positive growth guidance. The report for fiscal Q3, released on May 7th, showed year-over-year revenue growth of 23.9 percent to $1.5 billion.
Even on a quarter-over-quarter basis, this represented a gain of 4.4 percent. When comparing the two fiscal years so far, management is actually beating its guidance with revenue growth of 26.2 percent.
Gross margin also rose from 30.3 percent in Q3 of 2024 to 35.2 percent. Even more impressive was a spike in operating income from $22 million a year ago to $72 million. Operating expenses rose substantially over the same period, but at the much slower rate of 32.5 percent.
One area where Coherent has struggled as it has invested to capitalize on its current growth opportunities, however, is in producing positive GAAP earnings.
Ignoring a brief period early in the 2020-21 era, the business had been solidly profitable on a GAAP basis consistently until 2022.
In the last 11 quarters, though, Coherent has only managed to produce positive GAAP EPS in one. GAAP loss per share in Q3 was $0.11, an improvement over the loss of $0.29 in the year-ago quarter.
With that said, the business is performing impressively when one takes into account adjusted EPS. On a non-GAAP basis, Coherent reported earnings of $0.91 per share in fiscal Q3, up $0.53 from the year-ago quarter.
Management is expecting a similar result in Q4, during which the business is projected to deliver adjusted EPS of $0.81 to $1.01 alongside a gross margin of 37 percent to 39 percent.
Is Coherent Undervalued?
Coherent’s valuation is an interesting mixed bag, but it’s possible that there’s still a bit of room for upward momentum in the stock. COHR’s price-to-sales and price-to-book ratios are both relatively low at 2.4 and 2.5, respectively.
The stock, however, is priced at over 50 times operating cash flow, making it fairly expensive from a cash flow perspective. With significant growth possible going forward, though, Coherent’s cash flows could improve substantially and justify this otherwise seemingly high ratio.
Tellingly, the amount of institutional buying has outpaced selling by a handy margin since August of last year. This likely suggests that Wall Street also sees additional value in Coherent, even without current GAAP earnings.
How High Could COHR Go?
Analysts currently seem to think that the COHR is trading a bit below its fair value. The consensus price target of $96.85 leaves about 11 percent of upside from the last price of $87.23.
With strong growth tailwinds, revenues already rising and increasing gross margins, there’s quite a lot to like about Coherent. Helpfully, the stock is also priced at a level that, if not actively undervalued, doesn’t seem to be overvalued either. This could help investors in the long run, as the stock won’t have to fight the gravity of an excessively optimistic valuation as the business grows.
Revenue growth is set to slow down a bit from its current highs. Management expects compounded revenue growth in the range of 10-15 percent over the next 3-4 years, a very respectable level but far below the rates Coherent is hitting at the moment. The good news is that EPS and free cash flow growth are expected to heat up even as revenue growth cools off.
If Coherent can maintain the midpoint of its revenue growth range at 12.5 percent over the coming 4 years, we’d expect to see the stock rise to nearly $140. This assumes that COHR remains priced at or around its current price-to-sales ratio. By that time, it’s also quite possible that Coherent could be back to posting respectable GAAP earnings, as the business is already narrowing its losses at the moment.
On a shorter time horizon, it seems likely that the roughly 11 percent upside projected by analysts over the next 12 months is probably a reasonable range to expect from the stock, barring any large revenue or earnings surprises.
With the business already in its fiscal Q4, management’s FY2025 guidance appears to be more or less fully priced in. Even if revenue growth slows in FY2026, Coherent is performing well enough that the stock will likely keep pushing gradually upwards.
Right now, Coherent appears to be a good buy as a play on ongoing data center and AI growth. While it doesn’t have the massive margins that large chip makers can generate, Coherent is producing crucial components for AI and building a moat for itself by partnering with NVIDIA.
The business also has decent growth opportunities in industrial settings, though the revenue from data center hardware is likely to be the largest growth driver for Coherent for the foreseeable future. With these advantages and the stock priced at a reasonable level, COHR could be a good investment for gradual, long-term compounding.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.