Coherent's Stunning Rally: Is This Rally Sustainable or a Valuation Trap?

Coherent Corp. [COHR] has delivered an impressive performance recently, with its stock climbing 111.7% over the past six months. This surge significantly outpaces the broader semiconductor industry’s 13.8% growth and the overall market’s 13.6% rise, capturing significant investor attention.

The Valuation Question Looms Large

Despite the strong momentum, one critical concern emerges: Coherent’s valuation metrics appear stretched. The stock trades at 32.42 times forward 12-month earnings per share—substantially above the semiconductor industry average of 25.32 times. Similarly, the company’s EV-to-EBITDA ratio stands at 24.07 times, compared to the sector average of 17.81 times. This premium pricing leaves limited room for disappointment.

AI Demand Driving Product Traction

The catalyst behind Coherent’s momentum is clear: explosive demand for AI infrastructure products. Management highlighted during recent earnings calls that 800G and 1.6T transceiver products are experiencing rapid adoption across AI datacenters. The company’s Indium Phosphide (InP) technology has gained manufacturing traction, with production efficiency improving on 6-inch formats. Coherent is ramping up InP production capacity in Jarfalla, Sweden, to capture this emerging opportunity.

Beyond transceivers, the company manufactures Optical Circuit Switches—infrastructure components critical for AI datacenters. Management estimates this product category represents a $2 billion addressable market opportunity. Given that the global AI market is valued at approximately $390.9 billion with a projected 30.6% compound annual growth rate through 2033, Coherent is well-positioned to capture meaningful market share.

Financial Foundation Shows Strength

On the balance sheet front, Coherent appears well-fortified. As of September 2025, the company held $875 million in cash against only $48 million in debt. The current ratio improved to 2.33—up 6.4% sequentially and well above the 1.58 industry average—signaling robust liquidity and financial flexibility.

Earnings Expansion Attracts Analyst Interest

The consensus financial forecasts reflect investor optimism about Coherent’s growth trajectory. For fiscal 2026, analysts expect revenues to reach $6.7 billion, representing 15.1% year-over-year growth, with further 14.5% expansion anticipated in fiscal 2027. More notably, fiscal 2026 EPS is forecast at $5.1—a 44.5% increase—while fiscal 2027 earnings could climb another 24.6%.

Recent analyst activity reinforces this confidence: over the past 60 days, eight and six EPS estimates for fiscal 2026 and 2027, respectively, have been revised upward with zero downward adjustments. Consensus revenue estimates have increased 11.1% for fiscal 2026 and 4.8% for fiscal 2027, highlighting sustained conviction in the company’s outlook.

Competitive Pressures Present a Reality Check

However, the competitive landscape warrants caution. Coherent faces determined rivals in Silicon Carbide (SiC) technology, where competitors hold significant market positions. One major player commands 12% of the SiC market, while another leads in high-performance MOSFETs for electric vehicle applications.

Notably, Coherent’s Material segment revenue declined 6% year-over-year in fiscal 2025 due to weakness in end-market demand—a warning sign that market share pressures are materializing. To maintain competitive relevance, Coherent must continue investing heavily in R&D and manufacturing capacity. This could create a tension between growth initiatives and near-term profitability.

The Verdict: Cautious Holding Position Justified

The investment case presents competing narratives. On one hand, Coherent possesses strong product fundamentals aligned with the AI datacenter boom, solid financial footing, and impressive earnings revisions. On the other hand, elevated valuation multiples leave minimal margin for execution missteps, and intensifying competitive threats could constrain market share gains.

For current investors, holding makes sense—the company’s structural growth story remains intact. For prospective buyers, waiting for a more reasonable entry point would be prudent, particularly if valuation multiples compress or earnings growth accelerates beyond current consensus expectations.

Coherent remains a core beneficiary of AI infrastructure spending, but at present valuations, the risk-reward balance does not strongly favor aggressive accumulation.