COHR Q4 Deep Dive: AI Data Center Demand and Capacity Expansion Drive Mixed Market Response

Materials and photonics company Coherent (NYSE:COHR) reported revenue ahead of Wall Street’s expectations in Q4 CY2025, with sales up 17.5% year on year to $1.69 billion. On top of that, next quarter’s revenue guidance ($1.77 billion at the midpoint) was surprisingly good and 3.4% above what analysts were expecting. Its non-GAAP profit of $1.29 per share was 7% above analysts’ consensus estimates.

Is now the time to buy COHR? Find out in our full research report (it’s free for active Edge members).

StockStory’s Take

Coherent’s fourth quarter was marked by higher-than-expected growth in both revenue and adjusted profit, yet the market’s reaction was notably negative. Management attributed this to extraordinary demand from AI-driven data center and communications customers, as well as improvements in production efficiency and pricing optimization. CEO James Anderson emphasized that “the visibility of the business is the best it’s ever been,” highlighting robust bookings, with customer commitments stretching into 2027. However, despite these operational achievements, investor concerns about industry supply-demand balance and competitive dynamics likely weighed on sentiment.

Looking ahead, Coherent’s forward guidance reflects optimism around continued demand growth in AI data centers and communications, supported by an aggressive ramp-up in six-inch indium phosphide production and new product launches. Management pointed to the ongoing expansion of manufacturing capacity and strategic design wins in next-generation optical technologies as key drivers of expected sequential revenue and margin growth. CFO Sherri Luther underscored the company’s focus on operational leverage and gross margin improvement, stating, “We remain focused on expanding profitability with disciplined execution against our long-term financial target model.”

Key Insights from Management’s Remarks

Management identified rapid capacity expansion, strong customer demand, and product mix shifts as primary drivers of quarterly results and upcoming performance.

• AI Data Center Demand Surge: The company highlighted exceptionally strong bookings for 800 gig and 1.6 terabit transceivers, fueled by AI data center build-outs. Anderson noted that customer orders are now being booked well into 2027, offering unprecedented visibility and supporting the case for accelerated capacity investments.
• Six-Inch Indium Phosphide Ramp: Coherent’s ramp-up of six-inch indium phosphide wafer production is central to its cost structure and margin expansion, with internal capacity expected to double by year-end. The six-inch wafers provide over four times as many chips at less than half the cost compared to three-inch wafers, which management believes is a key competitive advantage.
• Growing Backlog in OCS Systems: The optical circuit switch (OCS) segment saw growing engagement, now with over 10 active customers and a backlog weighted toward larger system sizes. Management sees OCS as a significant, incremental market opportunity, with revenue contributions expected to ramp meaningfully through 2026.
• Portfolio Optimization and Divestiture: The company completed the sale of its Munich-based product division, which management expects to be immediately accretive to both gross margin and earnings per share. This move is part of a broader effort to streamline operations, having exited 33 sites in recent quarters.
• Input Cost and Pricing Optimization: Despite some higher input costs for externally sourced components, gross margin benefited from improved manufacturing yields, cost reductions, and ongoing pricing optimization. Luther reported that pricing improvements and operational efficiencies have driven a 470-basis-point increase in gross margin since 2024.

Drivers of Future Performance

Management expects future performance to be shaped by accelerating AI infrastructure demand, production scaling, and gross margin improvement initiatives.

• Capacity Expansion and Supply-Demand Imbalance: Coherent plans to double its internal indium phosphide capacity by the end of the year, but industry-wide supply is expected to remain tight. Management does not foresee equilibrium between supply and demand in the near future, suggesting continued pricing power and strong order flow.
• Product Mix and Margin Accretion: The ramp of 1.6 terabit transceivers and next-generation OCS products is expected to drive higher average selling prices and gross margins. Anderson stated that the 1.6 terabit ramp should be margin accretive, aided by the cost benefits of six-inch wafer production.
• Operational Leverage and SG&A Discipline: While R&D investment will continue to support growth in data center and communications, management is targeting further reductions in selling, general, and administrative expenses as a percentage of revenue. Luther confirmed the company’s ambition to reach 8% of revenue for SG&A and 10% for R&D over time.

Catalysts in Upcoming Quarters

In coming quarters, the StockStory team will closely monitor (1) the pace of six-inch indium phosphide production ramp and its impact on gross margins, (2) progress in scaling OCS and co-packaged optics solutions with key customer design wins, and (3) ongoing order momentum and backlog growth in AI-driven data center and communications segments. Additional focus will be on execution of portfolio optimization and the ability to maintain operational leverage as investments in capacity and R&D continue.

Coherent currently trades at $205.44, down from $211 just before the earnings. Is there an opportunity in the stock?The answer lies in our full research report (it’s free).

Our Favorite Stocks Right Now

Your portfolio can’t afford to be based on yesterday’s story. The risk in a handful of heavily crowded stocks is rising daily.

The names generating the next wave of massive growth are right here in our Top 5 Strong Momentum Stocks for this week. This is a curated list of our High Quality stocks that have generated a market-beating return of 244% over the last five years (as of June 30, 2025).

Stocks that have made our list include now familiar names such as Nvidia (+1,326% between June 2020 and June 2025) as well as under-the-radar businesses like the once-small-cap company Comfort Systems (+782% five-year return). Find your next big winner with StockStory today.