Coherent gains from the AI chip boom

Key Points

• Coherent makes lasers and optical technology products like its 800G Datacom transceivers that convert electrical signals into optical signals, enabling data to be transmitted through optical fiber networks.
• Artificial intelligence (AI) applications are driving Datacom demand, driving its 800G transceiver business through the $100 million quarterly threshold, growing sequential revenues by 100%.
• Mitsubishi Electric and DENSO invested $1 billion each to gain a 12.5% non-controlling interest in Silicon Carbide LLC, Coherent's silicon carbide business and entered into long-term supply agreements.

 

Coherent Co. NYSE: COHR develops and manufactures lasers and optical technologies through its Compound Semiconductors and Photonic Solutions divisions. Formerly known pre-merger as II-VI, Coherent is an information technology sector company implementing a multi-year restructuring plan to streamline operations. The company is benefitting from the artificial intelligence (AI) boom. 

The demand drives sales of its AI and machine language (ML) related Datacom transceivers through the $100 million quarterly thresholds. 

Silicon Carbide LLC 

Coherent stated it is more confident in the long-term outlook of its silicon carbide business (SiC). SiC is a silicon and carbon atoms compound that creates a highly durable, abrasive, rigid material with high thermal conductivity and melting point. The compound occurs in semiconductors, electronics, ceramics, diodes and transistors.

Coherent completed its agreement with Mitsubishi Electric and DENSO Co. to create a new company with its silicon carbide business called Silicon Carbide LLC. Each company received a 12.5% stake after investing $1 billion into the new company and establishing long-term supply agreements to support their demand for silicon carbide substrates and epitaxial wafers. Coherent is the big winner as it owns 75% of the operations. 

Lasers to chips to data centers

Coherent's laser products bolster digital communications infrastructure. From lithographic functions like scribing semiconductor wafers with microscopic integrated circuits to maintaining bandwidth with optical network transceivers, the company is benefitting from the secular tailwinds in the semiconductors, bandwidth and AI/ML segments. 

Its data center business is thriving as its 800G revenues rose 100% sequentially, and demand is growing stronger for its 1.6T transceivers and components expected to launch in the first quarter of fiscal 2025. The company competes with Lumentum Holdings Inc. NASDAQ: LITE and IPG Photonics Co. NASDAQ: IPGP. 

Improving demand trends 

Coherent reported fiscal Q2 2024 EPS of 36 cents, beating 26 cents consensus analyst estimates by 10 cents. Revenues slipped 17.4% YoY to $1.13 billion, beating analyst estimates of $1.12 billion and growing 7% sequentially. Non-GAAP gross margin was 36%. 

Operating cash flow was $67 million, down from $220 million in the year-ago period. The company paid down $89 million of outstanding debt. While macroeconomic uncertainty remains in the near term, Coherent is seeing improving demand trends and expects ongoing sequential improvement in revenue growth through the remainder of fiscal 2024.

Fiscal Q3 2024 outlook

Coherent provided flat guidance for its fiscal Q3 2024. Revenue should go between $1.12 billion to $1.20 billion versus $1.17 billion consensus analyst estimates. Non-GAAP gross margin should occur between 36% to 38%. Non-GAAP EPS should range between 32 cents and 52 cents versus 38 cents analyst estimates. CapEx should happen in the range of $115 million to $145 million, of which Silicon Carbide LLC will fund $50 million.

Raising fiscal full-year 2024 outlook 

Full-year 2024 revenues should be between $4.55 billion to $4.70 billion versus $4.58 billion consensus analyst estimates. Full-year EPS will be between $1.30 and $1.70, up from $1.50 to $1.70 in previous forecasts versus $1.33 in consensus analyst estimates. Restructuring, consolidation and synergies expenses are estimated to be between $155 million and $177 million.

Coherent CEO Vincent Materra commented, "Our longer-term outlook for improved margin structure and strong secular growth in all of our markets remains unchanged, driven by both an eventual recovery in end market demand and the impact of AI along with other significant drivers…"

Matera added, "Underlying our revised outlook, the second quarter reinforced our confidence in the outlook for our Datacom vertical (which is within our communications market) driven by AI-related datacenter builds by Webscale, other cloud internet content providers and companies that supply them."

Coherent analyst ratings and price targets are at MarketBeat. Check out Coherent peers and competitor stocks with the MarketBeat stock screener.

Daily ascending triangle and golden cross breakout 

The daily candlestick chart on COHR illustrates an ascending triangle pattern indicated by a flat-top upper trendline versus the ascending trendline. 

There is a limited number of candles in the pattern considering the price gap to $55 from $49.74 formed following its fiscal Q2 2024 earnings release. The daily 50-period moving average (MA) crossed through the 200-period MA, triggering the Golden Cross breakout on January 9. The daily relative strength index (RSI) has surged to lofty overbought levels at the 85-band. Pullback support levels are at $55, $52.99, $49.74 and $44.11.