Coherent (COHR 4.12%) and Lumentum (LITE 3.36%) are two of the world's largest producers of lasers and optical communications chips. But over the past year, Coherent's stock stayed nearly flat as Lumentum's stock plummeted 40%.
Coherent, known as II‐VI before it acquired the original Coherent and assumed its name and ticker last July, impressed investors with its improved scale and the growth potential of its artificial intelligence-oriented (AI-oriented) and silicon carbide businesses. Lumentum, which nearly merged with the original Coherent before it was outbid by II-VI, disappointed investors with its slowing growth and lack of near-term catalysts.
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Should investors still count on Coherent to generate bigger gains than Lumentum? Let's take a fresh look at their business models, growth rates, and valuations to find out.
The similarities and differences
Coherent and Lumentum both have some customer concentration issues. Coherent generated "more than 10%" of its revenue from its largest customer in fiscal 2023 (which ended on June 30). It didn't name that customer, but its top clients currently include Apple (NASDAQ: AAPL), Ford Motor Company, and Applied Materials. Lumentum relied on Apple for 12% of its revenue in fiscal 2023 (which ended on July 1). Another 15% came from Ciena and 11% from Nokia.
Coherent and Lumentum both produce vertical-cavity surface-emitting lasers (VCSELs) that power the iPhone's Face ID and 3D-sensing features. They also develop lasers for LiDAR systems in semi-autonomous and autonomous vehicles.
Both companies sell datacom transceivers, which convert optical signals to electrical signals within data centers. The explosive growth of the cloud and AI markets is driving data centers to install more transceivers to process that flood of information. Coherent and Lumentum lead that growing market with their top-tier 800G datacom transceivers.
However, Coherent also sells engineered materials, optoelectronic devices, and silicon carbide semiconductors through its materials segment. Its silicon carbide unit is attracting the most attention because its wide-bandgap (WBG) chips can operate at higher voltages and temperatures than traditional silicon chips. That makes them well-suited for military radars, 5G base stations, and electric vehicles. Lumentum doesn't directly sell engineered materials or silicon carbide products.
Which company is growing faster?
Coherent's revenue surged 56% in fiscal 2023, but most of that growth came from II-VI's takeover of the original Coherent. If we look past that inorganic year-over-year growth, we'll notice its revenue actually declined sequentially over the past two quarters. And it's bracing for another sequential decline in the first quarter of fiscal 2024.
For fiscal 2024, it expects its revenue to decline 9%-13% as it fully laps its acquisition of the old Coherent and faces tougher macro headwinds across the industrial, instrumental, consumer electronics, and communications markets. It expects its adjusted earnings per share (EPS) to decline 50%-67% for the full year as it grapples with its slowing sales growth and rising costs.
That slowdown is disappointing, but Coherent insists the growth of its AI-oriented datacom chips and silicon carbide business -- which only accounted for 6% of its sales in its latest quarter -- will drive its long-term recovery. II-VI's acquisition of Coherent also made it the world's largest photonics company -- and that scale could give it an edge against Lumentum, MKS Instruments, and other major competitors.
Lumentum's revenue rose 3% in fiscal 2023 as its core optical communications business grew at a slower clip than its smaller laser business. It also likely disappointed investors by failing to close its planned merger with Coherent, which would have made it the world's top photonics company instead of II-VI.
Lumentum didn't provide any guidance before the first quarter of 2024, but it also predicted the AI-oriented datacom transceiver market would drive most of its growth. For the full year, analysts expect Lumentum's revenue and adjusted EPS to decline 23% and 59%, respectively, as it works through its customer inventory correction cycle.
Which stock has more upside potential?
In other words, both optical leaders will likely remain weak for the foreseeable future. Apple's slowing iPhone sales could also impact both companies' VSCEL sales. However, Coherent's superior scale, milder slowdown, and exposure to the nascent silicon carbide market could make it a better overall investment than Lumentum.
That's probably why Coherent's stock outperformed Lumentum's by a mile over the past 12 months. Coherent trades at 26 times forward earnings, while Lumentum has a slightly lower forward multiple of 24. But I believe Coherent deserves that slight premium because its strengths will enable it to outperform Lumentum for the foreseeable future.
