Advanced AI And Optical Platforms Will Open New Markets

Key Takeaways

• Strategic R&D investments and diverse technology offerings are set to drive revenue growth with advanced AI and optical product ramps.
  
• Portfolio and pricing optimizations aim to streamline operations and expand gross margins for improved long-term earnings.
  
• Near-term revenue and margin pressures persist due to industrial market softness, weak automotive demand, and global trade dynamics impacting costs and supply chains.

Catalysts

Develops, manufactures, and markets engineered materials, optoelectronic components and devices, and optical and laser systems and subsystems for the use in the industrial, communications, electronics, and instrumentation markets worldwide.

• Coherent's investment in strategic R&D and a diverse technology portfolio, including advanced AI data center transceivers and optical products, is expected to drive revenue growth as these products ramp up in the upcoming quarters.
  
• The ongoing expansion in indium phosphide capacity and collaboration with the U.S. government for infrastructure improvements are poised to support long-term growth in high-speed data transmission, impacting future revenue and profitability.
  
• The introduction of innovative products like the Optical Circuit Switch (OCS) platform, which enables significant market expansion with novel digital liquid crystal technology, is set to enhance revenue streams starting in calendar 2025.
  
• Strategic pricing optimization and product cost reduction efforts, coupled with a focus on improving yields, are expected to drive gross margin expansion, ultimately contributing to improved earnings over time.
  
• The ongoing strategic portfolio optimization, including divestitures of non-core assets, is planned to streamline operations and focus on higher-margin and higher-growth opportunities, thereby supporting future enhancements in net margins and earnings.

Coherent Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Coherent's revenue will grow by 10.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from -1.1% today to 10.0% in 3 years time.
• Analysts expect earnings to reach $712.1 million (and earnings per share of $3.3) by about May 2028, up from $-59.1 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 27.6x on those 2028 earnings, up from -170.1x today. This future PE is greater than the current PE for the US Electronic industry at 20.6x.
• Analysts expect the number of shares outstanding to grow by 1.64% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.28%, as per the Simply Wall St company report.

Coherent Future Earnings Per Share Growth

Risks

• The company remains cautious about near-term softness in industrial-related markets, including the materials segment, which could impact revenue growth and gross margins.
  
• Weak automotive end-market demand contributed to a year-over-year decrease in the Materials segment revenue, which may continue to be a challenge if market conditions do not improve, affecting revenue.
  
• Despite an overall robust performance, the company still faces a lot more work to achieve its long-term gross margin target of 40%, indicating potential challenges in cost management and pricing optimization which can impact net margins.
  
• The strategic portfolio optimization involves divesting or shutting down nonstrategic product lines, which may lead to short-term restructuring costs and uncertainty, impacting operating expenses and earnings.
  
• Potential impacts from tariffs and global trade dynamics, particularly with a Chinese manufacturing footprint, could pose risks to the supply chain and cost structures, influencing profitability and net margins.

Valuation

• The analysts have a consensus price target of $95.574 for Coherent based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $125.0, and the most bearish reporting a price target of just $47.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $7.2 billion, earnings will come to $712.1 million, and it would be trading on a PE ratio of 27.6x, assuming you use a discount rate of 8.3%.
• Given the current share price of $64.84, the analyst price target of $95.57 is 32.2% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.