What happened

Shares of laser systems and components maker Coherent (COHR 1.03%) are glowing bright green Wednesday morning, up 11.8% as of 10:20 a.m. ET after just barely missing analyst sales targets for fiscal Q1 2023 -- but crushing on earnings.

Coherent, which is the name of the new company that emerged from the merger of II-VI with Coherent this past summer, was only expected to earn $0.83 per share (pro forma) in its first fiscal quarter, but ended up earning $1.04 per share instead. Sales for the quarter -- $1.34 billion -- fell just short of analysts' target of $1.35 billion, according to a report from The Fly.    

So what

And that's OK. Even if Coherent missed revenue, it still posted 69% year-over-year revenue growth. And yes, this was largely due to merging two companies' revenue streams into one, but Coherent pointed out that it also grew revenue organically by 20% (i.e., the average growth of each of the companies that merged to form the new Coherent was 20%).  

Costs of the merger, and the specifics of generally accepted accounting principles (GAAP) accounting, meant that GAAP earnings for the quarter were negative $0.56, which won't do anything good for the company's P/E ratio (which now stands at a pricey 34 times earnings). But at least pro forma profits went up 19.5% -- in line with the organic revenue growth rate.

Now what

So considering all of the above, how should investors be thinking about Coherent stock today?

Valued on GAAP earnings, Coherent currently sells for 34 times earnings -- not the highest valuation on the stock market, but it seems a bit on the expensive side even for a company growing sales, and pro forma earnings, at 20%. Free cash flow at present is an anemic $35 million, which doesn't do much to help the near-term investment case.

That being said, most analysts on Wall Street expect both net income and free cash flow to bounce back in 2023 and beyond. For example, S&P Global Market Intelligence has Coherent generating nearly $330 million in real cash profit as early as next year. On Coherent's $4.1 billion market capitalization, that works out to a valuation of only 12.6 times FCF.

If Coherent can maintain (or grow?) its current 20% growth rate, I'd say that's a pretty cheap price for Coherent stock.