Is Corning a Hidden AI Play?

Corning Incorporated (NYSE:GLW) is best known as a specialty glass and ceramics technology firm. Corning’s products are spread across electronic displays, telecommunications, life sciences, and specialty materials for the automotive industry.

One reason it’s done so well across so many industries is that it’s very much to the forefront of materials science and the engineering of materials, which combined have produced a competitive edge.

The stock has gained 51% over the past year so will the momentum continue?

Corning Playing a Vital Role in Powering Data Centers for Artificial Intelligence

The growing use of artificial intelligence and data centers requires steady infrastructure, fast bandwidth, and secure and efficient ways of data storage and transfer, which are supported by Corning.

With the advancement of AI technologies and the massive growth of data centers, there is a need for fast data transfers.

Corning’s optical fiber products, such as the Corning® SMF-28® Contour fiber, support the high-speed, high-capacity connection required for such applications. These fibers allow efficient data transmission with minimal latency, which is critical when dealing with AI applications that require real-time processing.

Also, increasing data center complexity enhances the value of high-performance glass. Durability and efficiency are obtained through the specialty glass developed by Corning for application in server technologies and other important components. Additionally, as data centers evolve to contain more data and modern technologies, the need for high-quality materials rises.

The long and short of it is that the emergence of AI and the growth of data centers present a large and growing market for Corning’s advanced components and structures that enable more and better connections while using highly reliable materials.

Sales Are Up But Profits Down

Evidence of Corning’s success can be seen in its partnerships. Corning and Lumen Technologies revealed an agreement that will allow the latter to reserve 10% of Corning’s fiber capacity for each of the following two years to facilitate the network involving AI-centered data centers.

This will be the first trial away from the plant to incorporate Corning’s latest generative AI fiber and cable system, and it’s translating to top line success.

In the most recent quarter, the company’s net sales came in at $3.25 billion compared to $3.24 billion in the prior-year quarter. Core sales increased to $3.60 billion from $3.48 billion.

Net income declined to $104 million from $281 million in the year-ago period, a 63% decline. EPS came in at $0.12 compared to $0.33, while core EPS was $0.47 compared to $0.45 in the prior-year quarter, meeting analysts’ estimates.

The company attributed this growth to the adoption of new optical connectivity products for generative AI, boosting the Enterprise portion of its Optical Communications business.

However, it is worth noting that the company’s revenues have declined at a 1.9% CAGR over the past three years, while net income fell by 36.8% annually. EPS also hit speed bump and slid by 21.6% CAGR over the past three years.

Is Corning a Buy Today?

Corning stock appears slightly overvalued with analysts consensus estimates sitting at $45.81 per share.

There is lots to like, though, for income-oriented investors thanks to the generous dividend yield on offer of 2.43%. A caveat should be added that the payout ratio is north of 200%, so the sustainability of the payout does remain in question.

With that said, Corning has a long history of delivering to shareholders and has a record of hiking its dividend for the past 13 years and consistently paying out over the past 18 years.

It’s also been profitable for the past year and expected to remain so for the next year. 

With a 90x PE ratio, it’s reasonable to be skeptical of the valuation at this time but net income growth forecasts of 35% annually over the next 5 years temper concerns considerably. If they come to fruition, Corning may well be cheaper than current forecasts predict.

A Deep Dive Into How Corning Makes Money

Corning was the first to manufacture low-loss optical fiber in 1970 and continues to be the industry leader in optical fibers, cables, and connectors. 

As demand for video and data services has increased, networks have turned away from copper and to optical systems where Corning has substantial experience.

The firm’s Optical Communications segment is divided into two groups, the carrier network and enterprise network.

The carrier network has products such as Vascade® for submarine networking and ClearCurve® for fiber networking to homes, as well as cable products and hardware like the Evolv™.

Solutions offered by the enterprise network include EDGE® for high-density cabling. This segment contributed to 30% of the total net sales of the company in the year 2023.

The Display Technologies segment of Corning offers glass substrates for LCDs and OLEDs of televisions, computers, tablets, and handheld devices.

In particular, Corning leverages fusion manufacturing to build high-quality, consistent, and stable glass required for large and high-performance displays. These include Corning® EAGLE XG® Slim Glass, Corning® Astra® Glass, Corning® Lotus™ NXT Glass, and Gen 10/10.5 glass substrates. This segment operates manufacturing facilities in China, South Korea, Japan, and Taiwan and accounted for 26% of the company’s total net sales in 2023.

The Specialty Materials business encompasses more than 150 items in glass, glass ceramics, and crystals, besides precision metrology instruments; some of the products of this division are Corning® Gorilla® Glass, which is used in billions of devices for mechanical strength and scratch resilience and semiconductor optics such as Corning® HPFS® Fused Silica.

The segment also manufactures the ultra-thin glass wafers used in augmented reality smart devices and advanced semiconductor packaging applications as well as sunglasses and radiation shielding glasses. This segment contributed to 14% of the net sales during the year of 2023.

Also, since Corning developed a high-performance ceramic substrate in the early seventies, it has been at the forefront of catalytic converters in automobiles. Corning’s Environmental Technologies segment accounted for 13% of Corning’s net sales in 2023.

Its life sciences segment, which has been in the business of laboratory products for over a century, drives its sales primarily through distributors in different parts of the world under brands such as Corning, Falcon, PYREX, and Axygen. Strong on patents and brands, this segment made up 7% of Corning’s net sales in 2023.

Corning’s emerging growth businesses nowadays include Hemlock Semiconductor Group (HSG), which provides high-purity polysilicon for the solar power and electronics industries. HSG provided polysilicon for solar power cells and semiconductor wafers and represented 10% of Corning’s net sales in 2023.

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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.