Coherent's AI Boom Delivers Record Sales, But Margin Concerns Trigger Profit-Taking

Coherent beats Q3 revenue and EPS estimates, fueled by AI demand and a $2B Nvidia investment, but margin concerns trigger a 7% stock dip.

Coherent has ridden the artificial intelligence wave to a standout quarter, with revenue surging past analyst expectations and a major cash infusion from Nvidia bolstering its balance sheet. Yet the stock has taken a hit, as investors fixate on the pace of margin expansion rather than the top-line fireworks.

The company reported fiscal third-quarter revenue of $1.81 billion, a 21% jump from the same period last year and ahead of the $1.78 billion consensus estimate. Stripping out divested businesses, organic growth accelerated to 27%. Adjusted earnings per share came in at $1.41, also topping analyst forecasts.

The data center and communications segment remains the powerhouse, generating $1.36 billion in revenue—roughly 75% of the total. The ramp-up of next-generation transceivers is fueling this momentum, as hyperscalers and cloud providers race to build out AI infrastructure. In contrast, the industrial division continues to lag, contributing just $444 million.

Nvidia's $2 Billion Vote of Confidence

Coherent's strategic importance to the AI ecosystem was underscored by Nvidia's decision to invest $2 billion in the company through a completed capital raise. The move has strengthened Coherent's financial position considerably: cash on hand now stands at $3 billion, while debt has been reduced to a minimum.

The partnership with the chip giant provides both capital and a seal of approval, positioning Coherent as a key supplier in the optical networking gear that connects AI clusters. The company is pouring money into capacity expansion to meet that demand, spending $290 million on property and equipment in the latest quarter alone. Management also plans to double production capacity for indium phosphide, a critical material for high-speed lasers.

Margin Story Tempers Enthusiasm

Despite the strong sales performance, the stock has slipped roughly 7% to around €273, with some market participants citing profit-taking after a relentless rally. The shares have more than quadrupled over the past 12 months, gaining over 63% since January.

The sticking point is the adjusted gross margin of 39.6%. While that represents a 105-basis-point improvement year over year, it fell short of the most optimistic investor expectations. Higher costs for externally sourced laser components are weighing on profitability, even as pricing improvements and manufacturing efficiencies provide some offset.

Analysts have responded by raising their price targets. Rosenblatt lifted its target to $425 with a Buy rating, while Jefferies set a $375 target and Stifel $420. Morgan Stanley remains more cautious at $330 with an Equal-weight rating, and B. Riley holds a Neutral stance with a $309 target.

Optimistic Outlook

Looking ahead to the fiscal fourth quarter, Coherent's management projects revenue in the range of $1.91 billion to $2.05 billion, with adjusted earnings per share potentially rising to $1.72. The guidance reflects continued strength in AI-related demand, though the market is weighing whether the heavy capital spending required to sustain that growth will ultimately pay off.