Coherent Corp Soars on BofA Upgrade: AI-Driven Growth and Operational Improvements Fuel Optimism
Coherent Corp (COHR) stock climbed on Monday after BofA Securities analyst Vivek Arya upgraded the company’s rating from Neutral to Buy, citing an anticipated surge in demand fueled by the burgeoning Artificial Intelligence (AI) market. Arya, who also bumped the price target from $65 to $75, believes Coherent is poised for strong growth driven by the increasing adoption of AI in data centers and the growing market for optical transceivers.
Key Takeaways:
- AI fuels Coherent’s growth: Arya expects Coherent’s datacom transceiver business (representing 40% of sales) to be a prime beneficiary of the rapidly expanding AI landscape. The analyst highlights the increasing size of large language models (LLMs), which are powering the growth of AI clusters, driving a surge in connectivity requirements.
- Improved Operational Outlook: Arya believes the new CEO, Jim Anderson, is driving significant operational improvements, including gross margin expansion, a focus on profitability, and a shift towards key growth areas.
- Balance Sheet Improvements: The analyst anticipates Coherent’s free cash flow will rise to 10% from 2%, facilitating the reduction of the company’s substantial debt ($4.1 billion).
- Price Target Increase: Arya’s revised price target reflects his increased confidence in Coherent’s operational focus and execution under the leadership of Jim Anderson.
A Spotlight on AI-Driven Data Center Growth
The heart of Arya’s bullish stance lies in the interconnectedness of AI and high-speed data communication. With the rise of LLMs, AI clusters are rapidly expanding, necessitating advanced connectivity solutions. Coherent’s expertise in optical transceivers, which are essential for high-speed data transmission, places the company in a prime position to capitalize on this growing demand.
"The rapidly growing size of large language models is expanding AI clusters to 100K+ accelerators versus 30K currently, driving exponentially higher connectivity requirements," Arya wrote in his research note.
New Leadership Driving Operational Transformation
While AI presents a tailwind for Coherent, Arya also points to the significant strides made under the new CEO, Jim Anderson. Anderson, known for his turnaround success at Lattice Semiconductor Corp (LSCC), is overseeing a strategic shift for Coherent, focusing on profitability and optimizing the company’s portfolio.
"The new management could also help focus Coherent from efforts currently spread across telco, industrial, auto (Silicon Carbide), and consumer markets," Arya said.
These operational improvements are expected to boost Coherent’s profitability significantly. Arya projects that Coherent’s pro forma earnings per share (EPS) could double to $4 by fiscal 2026, driven by a combination of the thriving AI market and Anderson’s operational efficiency strategies.
Debt Reduction and Free Cash Flow Expansion
Coherent’s substantial debt load has been a drag on the company’s performance. However, Arya sees a path towards deleveraging, driven by increasing free cash flow. "Free cash flow expansion towards 10% from 2% could help de-lever the balance sheet ($4.1 billion debt currently), which is a 30% drag on reported EPS," he wrote.
This financial restructuring will further strengthen Coherent’s position, freeing up resources to invest in growth opportunities and enhance shareholder value.
A Bright Future Ahead for Coherent?
While Coherent’s stock has witnessed significant fluctuations in recent years, Arya believes the confluence of a dynamic AI market, robust operational improvements, and a strategic focus on key growth areas will propel the company towards a brighter future. The analyst’s optimistic outlook, coupled with the positive stock reaction to his upgrade, suggests a potential shift in sentiment surrounding Coherent, making it a stock to watch in the months ahead.
