How High Will Coherent Stock Go?

An investor favorite for AI exposure, Coherent Corp. (NYSE:COHR) stock has been soaring following its fiscal second quarter 2024 earnings release last month.

Although the company’s revenues declined on a year-over-year basis, what interested investors is management’s robust demand outlook for its transceivers for AI.

Coherent is a leading photonics and compound semiconductors provider with a footprint that stretches across 20 countries.

The stock has delivered 120% returns over the past six months and hit a 52-week high of $67.94 in Q1 so high can it ultimately go?

Do The Financials Justify The Price?

For the fiscal second quarter ended December 2023, Coherent reported a 17.4% year-over-year decline in revenue to $1.13 billion. However, it exceeded the midpoint of its guidance range.

The company has been struggling amid macroeconomic uncertainties. There was a 4% year-over-year decrease in orders. At the end of the fiscal second quarter, the backlog was around $2.9 billion.

Also, its non-GAAP operating margin of 15.2% surpassed the high-end of the guidance range, while non-GAAP EPS came in at $0.36, down 62.1% year-over-year but above the high-end of its guidance. Moreover, Coherent surpassed revenue and EPS consensus estimates by 1.5% and 41.5%, respectively.

Operating cash flow stood at a reasonable $67 million and helped to reduce the outstanding debt by $89 million.

Importantly, management is ramping up efforts to improve the firm’s margin structure. While the year-over-year comparisons might not be satisfactory, a sequential increase in gross and operating margins were evident.

The gross margin improvement coupled with steady operating leverage helped to drive improvement in operating margin by 260 bps. Management aims to hi non-GAAP gross margin of 40% and a non-GAAP operating margin of 20% within the first half of fiscal 2026.

Although macroeconomic issues might linger, the company expects to realize sequential revenue improvement in the remaining quarters of fiscal 2024.

In addition, Coherent’s full-year outlook demonstrates confidence in growth opportunities from favorable end market demand, specifically in AI.

As a result, management has lifted the lower end of its revenue outlook for the fiscal year by $50 million. They expect full-year revenue in the range of $4.55 to 4.70 billion. Also, it has raised the non-GAAP EPS guidance to $1.30 to 1.70, a moderate increase from the expected range of $1.00 to $ 1.50.

Revenue and EPS for the second half of fiscal 2024 are forecast to improve by 12% and 90% respectively from the first half, mainly attributed to strength in the transceiver business.

While the company’s recent financials do not justify the price surge, management’s confidence in the future top and bottom lines appear to have been the driving forces.

Is Coherent Poised to Benefit From the AI Boom?

Coherent is seeing significant momentum across its AI/ML portfolio. Revenue from its 800G transceiver witnessed a more than 100% sequential increase to over $100 million in the last reported quarter. Moreover, this marked the company’s third consecutive quarter experiencing solid AI/ML datacom transceivers demand.

Management anticipates 50% of Datacom transceiver revenue for fiscal 2024 to be driven by AI-related revenue and the strong demand environment to remain in the next fiscal year and beyond.

In the first quarter of fiscal 2025, it expects to launch 1.6T transceivers and related components. Coherent sees continued strength in the Datacom segment amid increasing demand for AI-related products and data center developments.

Management expects the Datacom transceiver market to grow at a 25% CAGR until 2028 amid strong demand. This forecast is a significant boost from its earlier projection of 18%.

Furthermore, the company consequently increased growth forecasts for 800G and upcoming 1.6T and 3.2T Datacom transceivers. It now forecasts the market for this line of transceivers to grow by over 70% CAGR until 2028 to more than $9 billion. Most of the total Datacom transceiver revenue is expected to be driven by 800G and 1.6T.

While the company focuses on enhancing its product line, it is also driving operational efficiencies and customer acquisition. 

Restructuring To Boost Margins

Macroeconomic issues affected Coherent’s revenue growth during the latter half of fiscal 2023, which encouraged it to seek a major restructuring plan for fiscal 2023 to 2025.

As part of this plan, certain manufacturing facilities will be subjected to consolidations, relocation, and closures. Restructuring activities led to $2 million net recoveries in the most recent quarter.

Related charges are expected to be $25 to $35 million for fiscal 2024, mainly attributed to employment reduction, facility move costs, and depreciation. Total savings are expected to be around $200 to $250 million for fiscal 2023 to 2025.

As part of these efforts, the company is consolidating its “most modern” compound semiconductor facilities and closing others for cost optimization.

Additionally, it was able to fast-track certain actions, which was decided as part of its target to achieve $250 million in three years of annual synergies.

How High Will Coherent Stock Go?

According to 18 analysts, Coherent stock is unlikely to go much higher given that fair value sits at $64.93 per share.

Certainly, Coherent is solidifying its business with cost reduction initiatives and streamlining operations, which are set to drive long-term growth. But following its noteworthy share price performance, the stock is trading at 41.78x non-GAAP forward earnings, which looks too expensive compared to the industry peers and the 5-year high.

With that said, it trades at 2.08x forward sales, roughly 30% lower than its sector average.

Overall, Wall Street analysts look skeptical about the stock’s further upside, as the consensus price target translate to only a 2.7% increase from the current price level.

There is a lack of agreement surrounding the stock’s ratings too. 8 out of 13 analysts consider Coherent to be worth buying, while 5 prefer a wait-and-watch approach and suggest a ‘Hold’ rating.

The bottom line is, despite the optimistic management guidance, the stock could see a pullback before it reaches new heights.

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