Why Did Stan Druckenmiller Buy Coherent?

While NVIDIA grabs the headlines, billionaire Stan Druckenmiller has pointed his canons towards Coherent Corp. (NASDAQ: COHR), making it the largest position in his portfolio. What is it about this stock that has warranted such a large stake and why did Stan put so many eggs in its basket?

The Silicon Carbide Revolution

A primary reason for Stan’s optimism is likely that Coherent sits squarely in the crosshairs of overlapping cutting-edge technologies that are critical supplier in high-growth markets. For example, it stands at the front of the pack when it comes to silicon carbide production, a semiconductor material that is rapidly becoming a linchpin in the electric vehicle and renewable energy sectors.

It’s difficult to overstate Coherent’s significance in this space because it is one of only two companies globally that is even capable of producing 200mm silicon carbide wafers at scale, the other being Wolfspeed.

When you look at in time, the implications of this market dominance are profound. That’s in no small part due to the SiC power device market projected to surge from $1.1 billion in 2021 to $6.3 billion by 2027, according to Yole Développement.

And what’s a primary driver? Tesla’s adoption of SiC in its Model 3, and the domino effect that has sparked a trend across the automotive industry.

Coherent’s SiC substrates make it possible for EV ranges to extend and to speed up charging times, both of which are critical factors in the mass adoption of electric vehicles.

For Druckenmiller’s whose track record of spotting new trends early is virtually unparalleled, Coherent’s SiC business likely represents an attractive proxy for the broader EV and renewable energy revolution.

Coherent’s Role In 5G and 6G

In recent years, 5G technology made headlines, and Coherent’s role here has potentially been more lucrative than many realize. For example, the company is the world’s largest merchant supplier of Indium Phosphide substrates, a critical component in high-speed optical communications and 5G infrastructure.

The numbers speak for themselves in many ways given that the global 5G infrastructure market is on track to mushroom from $3.2 billion in 2020 to an eye-opening $47.8 billion by 2027, according to Grand View Research. Coherent’s dominant position in InP production places it at the heart of this growth trajectory.

Yet Coherent isn’t resting on its laurels with 5G alone. It is already investing heavily in technologies for 6G networks that are expected to be commercialized by the turn of the decade. The company’s focus on materials like Gallium Nitride places it in a great spot for this next telecommunications tech leap.

The Semiconductor Manufacturing Edge

Another area where Coherent shines brightly is in semiconductor manufacturing equipment, which is often overlooked but very much critical to the global chip supply chain.

It’s is a key supplier of calcium fluoride crystals used in Extreme Ultraviolet lithography machines, which are the most advanced chip-making tools produced by ASML. Coherent virtually owns this niche but crucial area of the industry, holding a massive 85% market share in calcium fluoride for lithography.

When you factor in where the semiconductor equipment market is likely headed, this becomes a key competitive advantage. It’s expected to hit $130.8 billion by 2028 and grow annually at 8.9% through 2028.  The bottom linen is Coherent’s place in the supply chain makes for a compelling investment opportunity.

Synergies and Scale Set Stage for Growth

The merger between II-VI and Coherent created a photonics titan with both synergies and scale advantages. As evidence of the fact, the company is forecasting $250 million in annual cost synergies within just 36 months of the merger closing. That’s a big opportunity to boost the bottom line. 

The merged entity also makes possible unparalleled vertical integration in the photonics industry that controls everything from raw materials to finished products.

Coupled with half a billion of R&D spend, Coherent is likely to cement its market leadership across numerous technology verticals.

So, How Do The Financial Metrics Look?

Coherent’s financial performance is a bit more choppy than you might expect for a company with so many tailwinds.

In three of the past four quarters, revenues have been down on a year-over-year basis. Still, earnings before interest and taxes have been positive in three out of four also.

It does seem as if the stock may have run a little too far too fast for analysts’ liking, given that ten of them have revised their estimates lower for the coming quarter. Indeed the consensus among analysts is for fair value to sit at $89 per share.

Why Did Stan Druckenmiller Buy Coherent?

The most likely reasons Stan Druckenmiller bought Coherent are because of its 85% share in calcium fluoride for lithography that is key to semiconductor manufacturing.

Overall, Coherent’s profile aligns remarkably well with Druckenmiller’s known investment preferences because it’s tethered to a series of growth trends from EVs and 5G/6G to advanced semiconductors.

The company’s market leadership in several key technologies provides pricing power opportunities as well as competitive moats, both key characteristics that have attracted Druckenmiller in the past.

Add to the mix the fact that the depth and complexity of Coherent’s technological capabilities are not widely understood by the market and you end up with a likely valuation disconnect that a skilled investor like Druckenmiller can exploit.

The company’s diverse technology portfolio also offers a handful of avenues to grow and provide the kind of optionality that Druckenmiller has historically gravitated towards in his investment approach.

A Compelling Investment Case

Whether it’s semi manufacturing, EVs or the next 6G revolution, Coherent has a long road ahead with numerous growth levers but it should be noted that a discounted cash flow analysis at this stage pegs fair value at $64 per share, and so it seems much of the optimism has been baked into the share price.

So, yes Coherent is at the nexus of several transformative technologies from next-generation communications to advanced computing and that’s likely a trend Druckenmiller sees as sustaining for years to come, hence the reason to put it  in the #1 position in his portfolio but perhaps a pullback offers a better entry point.

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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.