Morgan Stanley comments on Coherent (COHR.US) Q1 financial report: not perfect but "good enough", the real highlight is the 20 billions USD long-term contract

According to information from Zhihui Finance APP, on November 5, Morgan Stanley released its review of Coherent’s (COHR.US) Q1 FY2027 financial report, maintaining an "Equal-weight" rating and a $325 target price. The report noted that both quarterly revenue and earnings exceeded expectations and, for the first time, clarified the potential scale of a $20 billion Near Packaging Optics (NPO) long-term agreement starting from 2028 over five years. However, the climb in gross margin continues to lag behind peers, with real profit margin flexibility expected in 2028. Morgan Stanley also significantly raised its earnings forecasts for FY2027 to FY2029.

Performance itself: “Not a perfect score, but enough to impress the judges”

Coherent reported Q1 revenue of $2.37 billion, surpassing expectations of $2.302 billion; non-GAAP gross margin was 40.6%, and earnings per share reached $2.09, both better than expected. AI remains the main driver: data center and communications segment revenue increased 79% year-on-year, accounting for 82% of total revenue, while data center interconnect (DCI) revenue broke $200 million in a single quarter. Management expects FY2027 revenue growth to exceed 60%, and for FY2028, to reach $4 billion per quarter. Since the share price had already corrected sharply over the past week and annual gains have essentially been erased, Morgan Stanley believes negative factors were priced in early and expects a muted market response after the results.

The most incremental news: A potential $20 billion long-term agreement

The true highlight of the report is order visibility for 2028 and beyond. The previously mentioned new NPO long-term agreement (LTA) has now been quantified—starting from 2028 for five years with a potential scale of $20 billion. Currently, the company holds more than 10 CPO (Co-Packaged Optics) projects, more than 10 NPO projects, and over 5 chip-to-chip interconnect projects. Scale-out CPO revenue is expected to exceed $100 million in Q3 and surpass $250 million by the end of 2027. As for the market debate over whether the 400-milliwatt continuous wave laser can be integrated into Nvidia’s complete machine solutions—this certification is not officially confirmed, and the company maintains that related revenues will be realized beginning in 2027; however, Morgan Stanley has not included this in its base-case logic.

Gross margin: Investors’ “sore spot”, management’s “postdated check”

The slow climb in gross margin relative to peers is the main criticism Coherent faces. Management has issued a “postdated check”: achieving over 45% gross margin by 2028. Morgan Stanley makes a clear distinction: most improvements will come in 2028 as CPO revenue scales up. On the supply chain side, there has been better-than-expected progress—indium phosphide (InP) capacity doubled year-on-year in the first quarter, ahead of schedule by a quarter. Based on this, Morgan Stanley raised its FY2027/2028/2029 EPS forecasts to $10.07/$15.19/$18.98 (up +9%/+14%/+13%), and the FY2028 forecast is nearly double year-to-date.