AI optical communication demand surges! Coherent (COHR.US) crushes expectations with its earnings and guidance, but stock price drops highlight the "perfect expectation" dilemma

According to Zhitong Finance APP, photonics giant Coherent (COHR.US) delivered what can be considered a flawless Q4 FY2026 earnings report after market close on Tuesday—both revenue and profit crushed Wall Street expectations, and Q1 FY2027 guidance was also exceptionally strong, signaling to the market that demand for AI optical interconnect is far from peaking. Yet, despite this "textbook" earnings release, the stock price fell about 5% after hours.

This seemingly paradoxical market reaction reflects the current core narrative in AI hardware investment: when a stock has surged 205% in a year and rallied another 8% on the day before earnings, the market is no longer pricing in “good or bad,” but rather “is it good enough.” In the showdown between “the two optical communication giants” Coherent and Lumentum (LITE.US), Wall Street is recalibrating its expectations of the AI infrastructure investment cycle with real money.

A historic report: Revenue breaks $2 billion for the first time, EPS surges 74%

For Q4 ended June 30, 2026, Coherent delivered a set of results worthy of being recorded in company history:

Revenue reached $2.05 billion, up 34% YoY, about 3.5% above the market expectation of $1.98 billion;

Adjusted EPS was $1.74, up 74% YoY, more than 7% higher than analyst consensus of $1.62;

Adjusted gross margin was 40.2%, up 215 basis points YoY;

Adjusted operating margin was 21.8%, a sharp increase of 381 basis points YoY;

GAAP EPS came in at $1.19, significantly improving from a loss of $0.83 YoY.

For the full fiscal year 2026, Coherent achieved $7.12 billion in revenue (up 28% on a pro-forma basis), and non-GAAP EPS of $5.61 (up 59% YoY). As CEO Jim Anderson said: “Fiscal 2026 was a stellar year for Coherent, with record revenue, significant margin expansion, and non-GAAP EPS growing at more than twice the rate of revenue.”

Coherent’s “perfect earnings”: AI data center business accounts for 79%

Coherent’s quarterly results were impeccable. Revenue of $2.05 billion not only beat analyst estimates of $1.98 billion but also marked the company’s first quarter ever surpassing the $2 billion mark. Non-GAAP EPS was $1.74, $0.12 above expectations. Non-GAAP gross margin expanded by 215 basis points YoY to 40.2%, and GAAP gross margin expanded by 277 basis points to 38.5% YoY.

The AI data center business has become the clear mainstay. The Datacenter & Communications segment delivered $1.62 billion in revenue, up 59% YoY, accounting for 79% of the company's total revenue. In contrast, industrial revenue fell from $511 million to $431 million, a 16% YoY decline, reflecting a complete strategic shift toward AI infrastructure.

CEO Jim Anderson stated in a press release, “Fiscal 2026 was a standout year for Coherent, with record revenue and significant margin expansion and Non-GAAP EPS growth more than double the rate of revenue.” He further pointed out, “As AI data center architectures increasingly shift from copper cabling to optical interconnect, we believe Coherent’s broad photonics technology portfolio and manufacturing scale will set us apart.”

Q1 Guidance Crushes Expectations: “Perfection” is Already Priced In

Coherent's guidance for Q1 FY2027 also comprehensively beats market expectations. The company expects revenue between $2.2B and $2.4B, with a midpoint of $2.3B, which is 8% above analyst consensus of $2.13B. Adjusted EPS is projected between $1.85 and $2.05, with a midpoint of $1.95, 10% higher than consensus of $1.77.

On capacity expansion, Coherent is pushing full steam ahead with manufacturing upgrades. The company is on track to double internal indium phosphide (InP) capacity by the end of the year, and plans to more than double it again by 2027. The company has signed a letter of intent for up to $50 million in CHIPS Act funding, and previously received $20 million from the Texas Semiconductor Innovation Fund and Sherman Economic Development Corporation.

However, this “crushing” guidance instead triggered profit-taking in the market. In regular trading ahead of the earnings release, Coherent’s stock price had already surged more than 8%, following strong results from Lumentum. Over the past year, the stock has accumulated a gain of 205%. When all good news is fully priced in, merely “beating expectations” is no longer enough to drive the price higher.

Coherent vs. Lumentum: A Battle of Scale

In terms of scale, Coherent, with $2.05 billion in quarterly revenue, holds the industry’s top spot, with revenue about twice that of Lumentum. In terms of growth, Lumentum’s 109% revenue growth and 267% EPS surge appear more aggressive. What they share in common is: demand for AI data center optical components is exploding at a pace far beyond expectations.

Lumentum’s “Efficiency Miracle”: Gross Margin Breaks 50% Mark

Lumentum, which also reported earnings on the same day, delivered a “small but mighty” growth story. Q4 revenue was $1.01 billion, up 109% YoY, marking the eighth consecutive quarter of revenue growth. Non-GAAP EPS was $3.23, up 267% YoY.

The most eye-catching metric was margin performance. Non-GAAP gross margin reached 50.4%, up a dramatic 1,260 basis points YoY. Surpassing the 50% threshold marks a new level of pricing power and operational leverage for Lumentum in the AI optical components field.

CEO Alan Lowe stated on the earnings call that pump lasers are essentially sold out, even as the company is rapidly increasing production. Lumentum expects pump laser shipments to quadruple in the coming quarters. In optical circuit switches (OCS), shipments doubled sequentially, and Lumentum expects to achieve three-digit OCS quarterly revenue for the first time in Q1 FY2027.

The “Fully Priced-In” Cruel Arithmetic

Coherent’s 5% after-hours pullback is not a rejection of fundamentals, but a mathematical correction between valuation and expectations.

First, the gains have front-loaded the future. A 205% run over the past year means the market had already priced in much of the long-term AI optical interconnect narrative. After an 8% jump on the day before earnings, any result that is “merely a beat” is insufficient to satisfy sky-high expectations.

Second, the drag from industrial business. While AI revenue grew 59%, a 16% decline in industrial business is a reminder that Coherent is not a pure AI company. Amidst booming AI data center demand, weakness in the traditional industrial market is an ongoing structural drag.

Third, concerns about cash flow. The report shows annual operating cash flow declined sharply. Against the backdrop of aggressive capacity expansion, cash flow quality has become a new dimension for investors to scrutinize.

The earnings reports released simultaneously by Coherent and Lumentum jointly paint a picture of exponential demand for AI optical interconnect. With revenue growth rates of 34% and 109%, respectively, margins continuously expanding, and Q1 guidance comprehensively beating expectations—behind these numbers is a clear trend: AI data centers are accelerating their transformation from the “copper cable era” to the “optical interconnect era.”

However, Coherent’s 5% after-hours pullback also exposes the core paradox of current AI hardware investment: when a stock has soared 205% in a year, even a “perfect earnings” report may be met with “sell the news.” In this second phase of AI infrastructure investment, the market’s focus is shifting from “whether there is demand” to “whether the valuation is justified.”