Coherent Corp. (COHR) is a best-in-breed optical maker. II-VI Incorporated merged with Coherent in 2022 and retained Coherent as the name.
COHR's bull thesis is very easy to digest:
As AI Inferencing begins to ramp up, companies need to scale AI Clusters, requiring more GPUs need to be stacked together. More GPUs will require higher bandwidth, which means there is a new cycle upon us in the Optical Arena - the 800G ramp, which begins in earnest in the middle of this year. We want to own the best-in-breed 800G name into this up-cycle. That company is Coherent. COHR is a Top Tier Inflection poised to manifest in the coming quarters.
Some color from our friend and 5-star Tip Ranks analyst, Hans Mosesmann, at Rosenblatt:
After digging into the story last night and further this morning, Coherent has a huge advantage in this cycle. Because it is vertically integrated and makes its own VCELs - a critical component needed to scale these 800G chips – Coherent is stacking new and big Data Center Customers.
Last quarter its 800G biz grew 100% sequentially, from $50M to $100M. We think this run-rate doubles again the next two quarters, as the cycle only really kicks in mid-year, with 2025 and 2026 being the true J-curve:
Take a look at JPMorgan’s comments on the upcoming AI Datacom Opportunity for Coherent:
Coherent’s F2Q24 provided investors with increased conviction relative to the growth prospects for FY25, led in particular by the AI Datacom opportunity. Specifically, Coherent highlighted 800G Datacom transceiver revenue increased 100%+ q/q to $100 mn+ in F2Q24, and expects it to ramp in subsequent quarters (and into FY25) as AI-related revenue tracks to 50%+ of Datacom transceiver revenue in FY24, implying the AI Datacom ramp is tracking well ahead of initial expectations - all of which will likely solidify Coherent’s position to investors as a key leader in the AI Datacom opportunity.
Coherent's earnings are going to double in its June 2025 fiscal year and grow another 37% the year after.
At $58, we are only paying 15x P/E on out-year numbers. Moreover, we think the company will see peak earnings of $5 two years out, so there is still a nice dispersion relative to consensus on out-year numbers, a key driver for future outperformance in the stock:
In case you were wondering why Fabrinet (FN) was down so much yesterday, it is because Coherent is taking a lot of share from them and Fabrinet's growth has peaked.
We think a secondary move in COHR is coming to $62-$65 the next few weeks. We will sell this part of our position - our trading tranche - into any such move. Looking further out, we believe COHR is headed to the $70s by the late summer.
Pricing degradation/lower margins are a key risk to monitor as new chips enter the market in 2025, i.e. AAOI's offerings.
We think a secondary move is coming to $62-$65 in the next few weeks as new funds do the math and take note of this big forthcoming ramp for COHR.
Trading Plan: We plan to buy in via VWAP the first 30 minutes today and buy all dips, thereafter, to $55-$57.50.
STOPS: We use stops and plan to use a close below the 10-day EMA as our stop on our trading tranche.
A decisive break below the 50-day SMA will serve as our stop on our longer-term piece.
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Disclosure: We plan to aggressively buy COHR Tuesday morning via both stock and in the money and, potentially, out of the money calls. We may change our positioning at a moment’s notice, without notifying you of any such moves.
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