Many tech investors likely recognize Coherent (COHR 4.12%) as the maker of lasers, optical equipment, and chips and it was acquired by II-VI last July. They also probably know II-VI rebranded itself as Coherent and took over its ticker.
Yet this "new" Coherent hasn't impressed investors so far. Its revenue declined sequentially over the past two quarters, and it's bracing for another sequential drop in its current quarter. Its gross and operating margins also contracted as its revenue growth cooled off. It blames that slowdown on the persistent macro headwinds for the industrial, instrumental, consumer electronics, and communications markets.
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For fiscal 2024, which ends next June, Coherent expects its revenue to decline 9%-13% as its adjusted EPS plunges 50%-67%. That gloomy outlook explains why its stock has declined 3% this year as the Nasdaq Composite advanced 28.5%.
Today we'll look beyond those numbers and discuss five other facts about Coherent that smart investors should know.
1. Coherent bought a lot of optical and laser companies
II-VI acquired a lot of companies before gobbling up the original Coherent. In the 1990s it acquired Litton Systems' silicon carbide group, Virgo Optics, Lightning Optical Corp., and numerous other companies. The combination of Virgo and Lightning-enabled II-VI to develop its first one-micron solid-state lasers.
Throughout the 2000s, II-VI's most important acquisitions included Avalon Photonics, Anadigics, and Epiworks, which enabled it to ramp up its production of vertical-cavity surface-emitting lasers (VCSELs) for 3D-sensing technologies. It expanded its silicon carbide business by acquiring Innovion, Ascatron, and some of General Electric's patents, and bought Finisar in 2019 to integrate its indium phosphide (InP) tech into its lasers and optical transceivers. In other words, II-IV purchase of Coherent and subsequent rebranding represents just another step in that inorganic expansion.
2. It nearly lost Coherent to one of its top competitors
Back in January 2021, Coherent agreed to merge with Lumentum (LITE 3.36%) to create the world's largest photonic company. That announcement drove MKS Instruments (MKSI 3.85%) and II-VI to launch rival bids for Coherent.
II-VI eventually emerged victorious with a $7.01 billion bid, which was 23% higher than Lumentum's initial bid of $5.7 billion. That offer valued Coherent at nearly five times the revenue it would generate in fiscal 2021 (which ended in October 2021).
That acquisition propelled Coherent past its industry peers. Analysts expect Coherent to generate $4.6 billion in revenue in its current fiscal year, compared to $1.4 billion for Lumentum and $3.7 billion for MKS Instruments. Coherent's enterprise value of $11.5 billion also makes it more valuable than Lumentum ($3.7 billion) and MKS ($9.9 billion).
3. Coherent is not too concerned about China's export curbs
When China introduced new export restrictions on gallium and germanium in August, many investors turned bearish on Coherent and its industry peers because those two chemical elements are required for the production of industrial lasers.
But in a press release, Coherent said the restrictions "will have minimal to no impact on the company's sales and prospects" due to "ample inventories of these materials" at the company and its supply chain partners. It also said it could "source the materials outside of China" and was already operating "efficient recycling programs" for both materials.
4. Coherent considers itself a silicon carbide play
Coherent's investors should also pay close attention to its nascent silicon carbide business. Silicon carbide chips can run at higher voltages, temperatures, and frequencies than traditional silicon chips. Those advantages make them well-suited for short-length LEDs, lasers, 5G base stations, military radars, and electric vehicles.
Coherent only generated 6% of its revenue from silicon carbide materials in its latest quarter, but it expects that business -- which currently operates as an independent subsidiary -- to expand significantly and attract more external investors over the long term. Two Japanese automakers -- Denso and Mitsubishi Electric -- recently invested a combined $1 billion in Coherent's silicon carbide unit to value it at about $4 billion.
5. It could benefit from the growth of the AI market
During Coherent's latest conference call, CEO Chuck Mattera warned investors that the company "will not see meaningful signs of recovery before the end of fiscal '24." But on the bright side, it still expects its stronger sales of its 800G datacom transceivers to offset the slower growth of its legacy products throughout the year.
Those transceivers are used to process large amounts of data at data centers, which makes them crucial nuts and bolts of the booming AI and machine learning markets. Therefore, Coherent might eventually benefit from the same AI tailwinds that lifted stocks like Nvidia and Super Micro to their all-time highs.
Do these factors make Coherent a better investment?
Coherent's stock isn't cheap at 27 times this year's earnings, and it still needs to overcome a lot of near-term headwinds before it starts growing again. Its scale and growth potential in the silicon carbide and AI markets suggest it has a bright future, but it's simply not a compelling investment right now when other high-quality stocks are on sale.
