Morgan Stanley: Coherent's first-quarter revenue topped the bank's expectations, while gross-margin improvement remains slow

Where did the first-quarter beat mainly come from?

Coherent's fiscal 2027 first-quarter revenue was 2.37 billion dollars, non-GAAP gross margin was 40.6%, and non-GAAP earnings per share were 2.09 dollars. All were above Morgan Stanley's prior estimates of 2.302 billion dollars, 40.5% and 1.96 dollars, respectively; this means results exceeded the bank's estimates, not necessarily market consensus.
Data-center and communications revenue grew 79% year over year, accounting for 82% of total sales; data-center and communications businesses grew 85% and 84%, respectively. Demand for 800G, 1.6T connectivity products and scale-across/DCI was strong, with scale-across/DCI revenue exceeding 200 million dollars in a single quarter; the industrial business was broadly flat.

The company said a new long-term NPO agreement has a potential value of about 20 billion dollars over five years, starting in 2028; it also disclosed more than 10 CPO projects, more than 10 NPO projects and 5 or more inter-chip projects. It offers a more concrete indication of the scale of longer-term demand, but revenue realization is set to begin in 2028.
The company also set quantified targets for nearer-term businesses: it expects scale-out CPO opportunities to exceed 100 million dollars in the third quarter of fiscal 2027 and 250 million dollars by year-end 2027; management also expects the first quarter with 3 billion dollars in revenue at the end of fiscal 2027, and a single-quarter figure of 4 billion dollars in fiscal 2028.

Morgan Stanley raised its fiscal 2027 revenue forecast from 10.554 billion dollars to 11.139 billion dollars, and its adjusted earnings-per-share forecast from 9.24 dollars to 10.07 dollars; its fiscal 2028 earnings-per-share forecast rose from 13.29 dollars to 15.19 dollars. The company has set a target of achieving gross margins above 45% before 2028, but the brokerage believes more pronounced margin improvement is more likely as CPO scales in 2028.
Gross-margin improvement is still slower than investors expect. The company said indium phosphide (InP) capacity doubled year over year, a quarter ahead of plan, but the mix of internally produced and externally sourced lasers has not yet shifted. Greater use of in-house lasers in the future could become an additional lever for margin improvement.

Morgan Stanley maintained its 325-dollar price target and Equal-weight rating. Its calculations imply that the target corresponds to about 21 times fiscal 2028 earnings per share of about 15 dollars, below the 25 times used previously. The bank believes AI businesses and long-term opportunities such as CPO and OCS support the valuation, but did not consequently assign a more positive relative rating.
Growth comes with substantial investment: operating cash flow was negative 93 million dollars in the first quarter of fiscal 2027, and purchases of property and equipment were 776 million dollars. If AI build-outs slow, CPO/NPO timelines are delayed, capacity execution falls short of expectations or EML components remain constrained, it will be harder for longer-term demand to convert into revenue and profits as planned.