The demand for AI optical communication is surging! Coherent (COHR.US) has completely surpassed expectations with its performance and guidance, while the decline in its stock price highlights the awkwardness of "perfect expectations."

Photonics giant Coherent (COHR.US) released a remarkable fourth-quarter earnings report for fiscal year 2026 after the market closed on Tuesdayboth revenue and profit significantly exceeded Wall Street expectations, and the guidance for the first quarter of fiscal year 2027 was also robust and above expectations, proclaiming to the market that the demand for AI optical interconnection is far from peaking. However, such a textbook-quality financial report resulted in a nearly 5% drop in after-hours trading. This seemingly contradictory market reaction reflects the core narrative surrounding AI hardware investments today: when a stock has already risen 205% over the past year, and surged another 8% in the day leading up to the earnings report, the markets valuation is not about whether its good or not, but rather is it good enough. In the performance showdown between Coherent and Lumentum (LITE.US), Wall Street is recalibrating its expectations for the AI infrastructure investment cycle with real money. Historic Earnings: Revenue Breaks $2 Billion for the First Time, EPS Soars 74% For the fourth quarter ending June 30, 2026, Coherent delivered a report that could go down in the companys history: Revenue reached $2.05 billion, an increase of 34% year-over-year, surpassing market expectations of $1.98 billion by approximately 3.5%; Adjusted EPS was $1.74, a year-over-year increase of 74%, exceeding analyst expectations of $1.62 by more than 7%; Adjusted gross margin was 40.2%, up 215 basis points year-over-year; Adjusted operating margin was 21.8%, significantly up 381 basis points year-over-year; GAAP EPS was $1.19, a substantial improvement from a loss of $0.83 in the same period last year. For the full fiscal year 2026, Coherent achieved revenue of $7.12 billion (growing 28% on a pro forma basis) and non-GAAP EPS of $5.61 (up 59% year-over-year). As CEO Jim Anderson stated, Fiscal year 2026 was a brilliant year for Coherent, with record revenue, significant margin expansion, and non-GAAP EPS growing more than twice the rate of revenue. Coherents Perfect Earnings Report: AI Data Center Business Accounts for 79% Coherents performance this quarter is impeccable. Revenue of $2.05 billion not only exceeded analyst expectations of $1.98 billion but also marked the first time the company surpassed the $2 billion milestone for a single quarter. The Non-GAAP EPS was $1.74, exceeding the expectation by $0.12. The Non-GAAP gross margin of 40.2% expanded by 215 basis points year-over-year, while the GAAP gross margin of 38.5% expanded by 277 basis points year-over-year. The AI data center business has become the absolute core. The Datacenter & Communications segment revenue reached $1.62 billion, a year-over-year increase of 59%, accounting for 79% of the companys total revenue. In contrast, industrial business revenue fell from $511 million to $431 million, a year-over-year decrease of 16%, reflecting a strategic pivot towards AI infrastructure. CEO Jim Anderson stated in the announcement, Fiscal year 2026 was a brilliant year for Coherent, with record revenue, significant margin expansion, and non-GAAP EPS growth that is more than double that of revenue growth. He further pointed out, As AI data center architectures increasingly transition from copper cabling to optical interconnection, we believe Coherents extensive photonic technology portfolio and manufacturing scale will set us apart. Q1 Guidance Crushes Expectations: The Market Had Already Priced in Perfection Coherents guidance for the first quarter of fiscal year 2027 also comprehensively exceeded market expectations. The company expects revenue of $2.2 to $2.4 billion, with a median of $2.3 billion, which is 8% higher than the analyst consensus of $2.13 billion. Adjusted EPS is expected to be between $1.85 and $2.05, with a median of $1.95, which is 10% above the analyst expectation of $1.77. In terms of capacity expansion, Coherent is fully committed to upgrading its manufacturing capabilities. The company plans to double its internal indium phosphide (InP) capacity by the end of the year and aims to more than double it again by 2027. The company has signed a commitment letter for up to $50 million under the CHIPS Act, having previously secured $20 million through the Texas Semiconductor Innovation Fund and the Sherman Economic Development Corporation. However, it was this "overwhelming" guidance that triggered market profit-taking. During the regular trading session prior to the earnings report, Coherents stock had already surged more than 8%, following the strong performance of Lumentum. The stock has gained a cumulative 205% over the past year. When all good news has already been fully priced in, "exceeding expectations" alone is no longer sufficient to drive the stock price higher. The Magnitude Battle Between Coherent and Lumentum In terms of scale, Coherents quarterly revenue of $2.05 billion firmly secures its position at the top of the industry, approximately double Lumentums revenue scale. However, in terms of growth rate, Lumentums 109% revenue growth and 267% EPS growth are more striking. Both companies share a common point: the demand for optical components in AI data centers is exploding at a rate far exceeding expectations. Lumentums Efficiency Miracle: Gross Margin Breaks 50% Threshold On the same day that Lumentum released its earnings report, it told a "small but precise" growth story. Q4 revenue was $1.01 billion, up 109% year-over-year, marking the eighth consecutive quarter of revenue growth. Non-GAAP EPS was $3.23, up 267% year-over-year. The most notable aspect is the gross margin performance. The Non-GAAP gross margin reached 50.4%, significantly up 1,260 basis points year-over-year. This milestone of crossing the 50% threshold signifies Lumentums newfound pricing power and operational leverage in the AI optical components sector. CEO Alan Lowe stated during the earnings call that pump lasers have essentially sold out, even though the company is rapidly ramping up production. It is anticipated that pump laser shipments will quadruple over the next few quarters. In the optical circuit switching (OCS) sector, Lumentums shipments doubled quarter-over-quarter, and it expects to achieve its first three-digit quarterly revenue from OCS in the first quarter of fiscal year 2027. The Cruel Arithmetic of Fully Priced Expectations The 5% pullback in Coherents stock after hours is not a denial of the fundamentals but rather a mathematical correction of the tension between valuation and expectations. First, the price increase has already priced in the future. A 205% increase over the past year means the market has largely front-loaded the long-term narrative of AI optical interconnection. After the stocks further 8% increase in the day before the earnings report, any result that only exceeds expectations can hardly satisfy the sky-high expectations that have been set. Second, the drag from industrial business. Although the AI business grew by 59%, the 16% decline in industrial business serves as a reminder to the market: Coherent is not solely an AI company. While demand from AI data centers continues to surge, the weakness in the traditional industrial market creates a structural drag. Third, concerns about cash flow. The earnings report revealed a significant decline in the companys operating cash flow for the year. In the context of aggressive capacity expansion, cash flow quality has become a new dimension for investors to scrutinize. The earnings reports from Coherent and Lumentum, released on the same day, collectively portray a picture of an industry where demand for AI optical interconnection is exploding at an exponential pace. The revenue growth rates of the two companies reached 34% and 109%, respectively, margins continue to expand, and Q1 guidance was fully above expectationsbehind these numbers is the certain trend of AI data centers transitioning from the "copper cable era" to the "optical interconnection era." However, Coherents 5% pullback after hours also reveals the core contradiction of current AI hardware investments: after a stock has risen 205% in a year, even with a perfect earnings report, the market may respond with sell the news. In the second phase of AI infrastructure investment, the markets focus is shifting from is there demand to is the valuation reasonable.