Well, this explains the nice gain today. It is kind of cool to think I have a tiny bit of my DNA is in the transceiver business to know some I worked at HP in fiberoptics and IR went to Finisar/IIVI/Coherent to lead the development of transceivers there... before moving on or retiring. (Does that make me sound like DJT? LOL)
Coherent rises after BofA upgrades on potential for improved execution, AI optical growth
Aug. 12, 2024 7:28 AM ET
By: Ravikash Bakolia, SA News Editor
Coherent's (NYSE:COHR) stock rose about 2% premarket on Monday after BofA upgraded the shares to Buy from Neutral citing potential for improved execution and AI optical market growth.
The firm also raised the price target to $75 from $65 on the stock of the company, which develops compound semiconductors and photonic solutions.
The analysts noted that they see improved prospects for Coherent to double pf-EPS to $4/share by FY26 as — growth reaccelerates to over 13% Compound annual growth rate, or CAGR, driven by surging AI optical transceiver market; new CEO Jim Anderson (joined in June) drives operational improvements, especially gross margin expansion towards 40%+ from 36% currently; and balance sheet delevering to less than 2x from 3x+ currently.
The analysts added that AI optics would help reaccelerate sales to 10% to 15% growth. Tough comps and weak legacy telco/industrial sales pressured the company's topline to -9.5% year-over-year decline in FY24 (which ends June quarter).
The analysts expect start of recovery in the second half of CY24 and forecast accelerating 13% sales CAGR from FY24-27. The most important driver will be the company's datacom transceiver business (40% of sales) levered to high-speed Ethernet connections between servers and switches in data centers.
Rapidly growing size of large language models, or LLMs, is expanding AI cluster to 100,000+ accelerators versus 30,000 currently, driving exponentially higher connectivity requirements at 800 Gb/s and 1.6 Tb/s (800G/1.6T), according to the analysts.
BofA noted that as per industry analyst LightCounting, sales of Ethernet optical transceivers could grow over 30% annually from CY24 to CY27 to over $18B. Coherent's vertical integration (laser, IC) could help sustain or expand its 20% to 25% share in this growing market.
The analysts said they like Coherent's selection of new CEO and industry veteran Jim Anderson, well regarded for his prior turnaround at Lattice Semiconductor. While Coherent is a different company (more analog, fabs, more competition compared to Lattice's mostly digital, fabless) they see plenty of headroom for Coherent to expand gross margin from a near industry-low of 36% to low 40s% range, with EBIT margins towards 20-25% from 15% currently.
In addition, Coherent's new management could also help focus the company from efforts currently spread across telco, industrial, auto (Silicon Carbide) and consumer markets. Free cash flow expansion towards 10% from 2% could help delever the balance sheet ($4.1B debt currently) that is a 30% drag on reported EPS, the analysts added.
Coherent (COHR) has a Hold rating at Seeking Alpha's Quant Rating system, which consistently beats the market. Meanwhile, the Seeking Alpha authors' average rating is also Hold, but the average Wall Street analysts' rating is more positive with a Buy. |
