Coherent Captures AI Datacenter Optics Demand Growth
Coherent is positioned to benefit from accelerating AI datacenter optics demand, driven by higher-average-selling-price transceivers and a move to 6-inch indium phosphide (InP) wafers. Analysts project revenue rising from $5.8B in FY2025 to $10.6B in FY2028E, with EPS compounding at a 45% CAGR and long-term adjusted gross margins exceeding 42%. Margin expansion is tied to InP scale, operating leverage, and favorable ASP mix. Optional growth vectors include SiC, CPO, and OCS product lines, plus a new Apple supply relationship. The company reports balance sheet deleveraging and a capital-light strategy that support the present valuation near a $68B market cap and a forward P/E around 65x. For infrastructure and hardware teams, the story underscores rising demand for compound-semiconductor photonics in AI networks and the economic impact of wafer-scale manufacturing transitions.
What happened
Coherent is rated a Buy on the thesis that accelerating AI datacenter optics demand will drive substantial revenue and margin upside. The research projects revenue growth from $5.8B in FY2025 to $10.6B in FY2028E and EPS compounding at a 45% CAGR, with long-term adjusted gross margins targeted above 42%.
Technical details
The upgrade thesis centers on a manufacturing and product mix shift. Coherent is scaling indium phosphide (InP) production via a transition to 6-inch InP wafers, which reduces cost per die and improves gross margins through higher throughput and yield improvements. Higher average selling prices (ASPs) for transceivers and operating leverage from larger volumes further lift margin profiles. Optionality sits in several product and materials vectors:
- •SiC (silicon carbide) devices offering power electronics upside
- •CPO and OCS product lines that diversify revenue beyond short-reach optics
- •A reported supply agreement with Apple
Context and significance
This is an infrastructure story at the intersection of compound semiconductors, photonics, and optical networking. Datacenter networks for large AI models are moving toward higher-bandwidth, higher-cost optics where material and wafer economics matter. The 6-inch InP transition is analogous to historical silicon scaling moves: it is a capital-efficient lever that improves gross margin sustainably if yields meet targets. The presence of SiC and OEM optionality reduces single-market exposure and maps to broader semiconductor demand cycles.
What to watch
Monitor execution on 6-inch InP yields and timing, ASP trajectory for transceivers, and early revenue cadence from the Apple relationship. If wafer economics and yields align with the plan, margin expansion will validate a premium growth multiple.
Bottom line
For practitioners tracking AI infrastructure inputs, Coherent represents a supplier whose product and wafer-scale manufacturing moves materially affect datacenter optics cost and availability, with potential upside to unit economics if execution holds.
Scoring Rationale
This is a notable infrastructure item for AI practitioners because wafer-scale economics and photonics supply affect datacenter network cost and capacity. It is company-specific and execution-dependent, so it is important but not industry-shaping.
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