What happened
Shares of Coherent (COHR 4.12%) were up 10% as of 11:33 a.m. ET on Tuesday after the company said its silicon carbide semiconductor business will receive $1 billion in investments from two Japanese automakers.
Denso and Mitsubishi Electric will each invest $500 million in exchange for a 12.5% interest in the new subsidiary. Coherent will own and operate the business, controlling a 75% interest. This move comes as Coherent is seeing growing demand for Datacom transceivers for artificial intelligence (AI).
So what
Coherent says its largest opportunity in the next year is addressing demand for 800G Datacom transceivers. Demand for these products is offsetting weakness in other areas of Coherent's business right now.
Silicon carbide (SiC) products are another major growth opportunity, since these are used for electric vehicles. Coherent will use the investment from Denso and Mitsubishi to expand production capacity. The market for SiC power semiconductors is expected to reach $21 billion in 2030, up from $3 billion in 2022.
Now what
Coherent shares trade at a forward price-to-earnings ratio of 25 based on this year's earnings estimate. Revenue has fallen due to weakness across the company's materials and lasers segments, while growth in the networks segment has been the bright spot.
However, management is focusing on controlling costs to position for more profitable growth when the macroeconomic environment turns around. The stock is only down 3% year to date, as Wall Street analysts expect a return to growth by fiscal 2025, with earnings per share reaching $2.76.
