Coherent Corp.COHR shares have fallen 17% in the past month despite rapidly improving operating results. Fiscal 2026 revenues climbed 22.5% to $7.12 billion as AI-driven Datacenter and Communications demand accelerated.

                                                                    Image Source: Zacks Investment Research

The investment debate now centers on whether Coherent can convert its record demand visibility into profitable cash flow. Rising capacity spending, working-capital needs and several overlapping product ramps keep execution risk elevated even as the growth runway lengthens.

COHR's AI Demand Backdrop Remains Strong

Datacenter and Communications generated $5.27 billion in fiscal 2026 revenues, up 40.5% year over year, and represented 79% of fourth-quarter revenues. Fiscal 2027 is essentially booked through the end of calendar 2027.

Customer orders now extend into calendar 2028, while long-term agreements reach through the end of the decade. Coherent also expects quarterly revenues to exceed $3 billion by the end of fiscal 2027, supported by capacity growth and new optical platforms.

Coherent's Margin Expansion Supports the Bull Case

Adjusted gross margin reached 40.2% in the fiscal fourth quarter, up 215 basis points year over year. Full-year adjusted gross margin improved 152 basis points to 39.4%, helped by lower input costs, better manufacturing yields and pricing optimization.

Six-inch indium phosphide wafers offer roughly four times the output at about half the cost of three-inch wafers, while yields are also higher. As that platform scales, management expects further margin improvement from its lower cost structure.

COHR's Cash Flow and Capex Raise Near-Term Risk

Fourth-quarter capital expenditures jumped to $556 million from $131 million a year earlier. Fiscal 2026 additions to property, plant and equipment reached $1.10 billion versus $440.8 million in fiscal 2025, and management expects another sequential capital-spending increase in the current quarter.

Operating cash flow fell to $79.5 million from $633.6 million, while inventory climbed 79.5% to $2.581 billion. The buildup supports expansion, but it also raises working-capital and demand-forecasting risk until production and cash generation catch up.

Coherent Faces a Crowded Execution Calendar

Indium phosphide remains the primary transceiver bottleneck, and nearly every Datacenter and Communications product line is supply constrained. Coherent must simultaneously scale 1.6-terabit transceivers, optical circuit switching, co-packaged optics, multi-rail products and six-inch wafer production while Industrial demand remains weak.