Coherent (COHR): NVIDIA's $2B Bet on Optical Networking's Moment

Key takeaways

Coherent is sharply refocusing on high-margin data center and optical connectivity markets, shedding non-core assets to improve growth prospects.
The company made significant acquisitions and divestitures to streamline operations, with recent deals supporting its strategic shift.
NVIDIA’s $2 billion equity investment highlights the importance of scaling manufacturing capacity in the optical and silicon carbide sectors.
Advancements in silicon carbide technology and wafer fabrication position Coherent to benefit from growth in AI data centers and power infrastructures.
Despite current negative free cash flow, Coherent’s strong cash position and growth strategy could lead to significant value creation, especially as the optical network industry gains momentum.

Summary

Overview of Coherent's Business Focus and Recent Performance

This section details Coherent (COHR) as a leading purveyor in the IDM and base materials sectors, specializing in indium phosphide and silicon carbide wafers. Under CEO Jim Anderson's leadership, the company has been refocusing its operations, divesting non-core assets such as aerospace, defense, and materials processing tools segments to sharpen its emphasis on data center, communications, and advanced materials. Financial highlights include a significant 41% year-over-year growth in data center and communication revenues, reaching nearly 75% of total income, and a pro forma revenue increase of 27%, supported by recent divestitures. The company's gross margins are approaching a key 40% milestone, underscoring their strategic focus on high-margin data center solutions.

Strategic Divestitures and Business Restructuring

This section discusses the strategic asset sales Coherent has executed to streamline operations and focus on growth areas. The company sold its aerospace and defense laser business to private equity for $400 million and exited a materials processing tools segment for approximately $51 million, reallocating resources to more promising sectors. These moves are part of Jim Anderson's goal to build a more cohesive, focused enterprise that emphasizes high-growth segments such as optical connectivity and AI data center infrastructure, thus appealing to investors seeking value and growth potential.

Investment in Silicon Carbide and Future Growth Drivers

The emphasis here is on Coherent's investments in silicon carbide technology, a key material for power electronics and data center applications. The company secured $500 million investments from Denso and Mitsubishi Electric, signaling confidence in silicon carbide wafers, especially for AI data centers and power infrastructures. The development of 300mm wafers and epitaxy platforms positions Coherent to capitalize on the burgeoning demand driven by AI, data centers, and power grid modernization. These investments are crucial for scaling manufacturing capacity, which requires significant capital infusion, partly sourced from NVIDIA's $2 billion equity investment.

Manufacturing Expansion, Finances, and Market Outlook

This section addresses the challenges and opportunities related to scaling manufacturing capacity. Coherent faces negative free cash flow, heavily invested in expanding production for optical components needed in high-growth markets. Their cash reserves have grown to $2.4 billion, partly from NVIDIA, helping fund capacity increases. The company expects Q3 revenue to reach up to $2 billion, with gross margins around 41%, despite ongoing negative free cash flow. The discussion compares Coherent to peer Lumentum, noting that Coherent is more of a value play focused on business focus and asset optimization, while Lumentum represents a momentum play. The optical networking sector is finally gaining industry-wide momentum, suggesting a promising future for Coherent’s targeted markets.

Show notes

Optical networking has spent years as a niche corner of the semiconductor industry. CSI makes the case that the moment for companies like Coherent may have finally arrived — and NVIDIA's two-billion-dollar equity investment in the company suggests the largest chipmaker in the world agrees.

Coherent (COHR), is an integrated device manufacturer and base materials supplier specializing in indium phosphide and silicon carbide wafers. Under CEO Jim Anderson, who pulled off a similar business transformation at Lattice Semiconductor, Coherent has been shedding non-core assets and sharpening its focus on data center and communications, which now represents seventy-five percent of revenue and posted forty-one percent year-over-year growth in the most recent quarter. Pro forma revenue growth came in at twenty-seven percent, with gross margins approaching the forty percent threshold that marks a key milestone for IDM-class businesses.

The divestitures tell the story of the transformation: a four-hundred-million-dollar sale of the aerospace and defense laser business to private equity, and a fifty-one-million-dollar exit from a materials processing tools segment that was diluting margins. What remains is a tighter, faster-growing business positioned at the intersection of AI data center infrastructure, optical connectivity, and advanced materials.

The NVIDIA investment is the centerpiece of this episode. With free cash flow running deeply negative as Coherent scales manufacturing capacity for co-packaged optics and near-package optics expected in the second half of 2026, the company needed capital. NVIDIA needed the optical components. The result was a cash-for-equity arrangement that Nick describes as a more direct version of the warrant-based incentive deals seen at companies like AMD and STMicro, cheaper than diluting shareholders, and cheaper than going to a bank.

The silicon carbide segment also draws attention, with five-hundred-million-dollar anchor investments from Denso and Mitsubishi Electric secured when silicon carbide was out of favor, now pointing toward three-hundred-millimeter wafer applications for AI data centers and power grid infrastructure.

Q3 guidance calls for revenue between 1.9 and just over 2 billion, gross margin at roughly 41%, and continued negative free cash flow as manufacturing scale-up accelerates. CSI compares Coherent to peer Lumentum — framing COHR as the value play and Lumentum as the momentum play — and confirm they are happy holding both.

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