Coherent Corp. (NYSE: COHR) experienced a sharp decline in its stock price on Thursday, closing at $327.33, a drop of 7.96%. This negative market reaction came despite the company reporting record-high quarterly revenue, highlighting investor concerns that go beyond just beating earnings estimates. The primary worry is the significant cash burn associated with the company's aggressive expansion in AI-optics capacity, which is outpacing its ability to generate cash.
In premarket trading on Friday, shares showed a modest recovery, up 0.68% to $329.57. However, the damage from the earnings report was done, as the market digested the company's fiscal 2026 financial results, which revealed a dramatic deterioration in cash flow metrics. Operating cash flow for the fiscal year plummeted to $79.5 million, an 87% decrease from the $633.6 million reported in the previous year. This stark contrast underscores the pressure that heavy capital expenditures are placing on the company's financials.
Capital Expenditures Surge, Free Cash Flow Turns Negative
Capital expenditures more than doubled to $1.10 billion, up from $440.8 million in fiscal 2025. This surge was driven by the need to expand capacity for AI-optics, a key growth area for the company. However, this investment has come at a cost. Preliminary free cash flow, calculated by subtracting capital expenditures from operating cash flow, turned sharply negative at -$1.02 billion, compared to a positive $192.8 million in the prior year. This shift marks a significant reversal in the company's cash generation capabilities.
The company's cash conversion has also been impacted, with the operating cash flow margin compressing to just 1.1% from 10.9% a year ago. This decline reflects the substantial increase in working capital requirements. Inventory levels surged by 79.5% to $2.58 billion, and accounts receivable rose by 39.3% to $1.34 billion. To fund this growth, Coherent issued approximately $2.00 billion in common shares over the year, adding to shareholder dilution.
Strong Operational Performance in Q4
Despite the cash flow concerns, Coherent delivered a strong operational performance in the fourth quarter. Revenue increased by 33.8% year-over-year to reach $2.05 billion. The non-GAAP gross margin expanded by 215 basis points to 40.2%, and adjusted earnings per diluted share grew by 74% to $1.74. GAAP diluted EPS also turned positive, coming in at $1.19, a significant improvement from a loss of $0.83 in the same quarter last year.
The datacenter and communications segment remained the primary growth driver, accounting for 79% of total sales in the quarter. This segment's revenue soared by 58.6% to $1.62 billion, reflecting robust demand for AI-related optical components. In contrast, the industrial segment saw a decline of 15.8% to $430.5 million, highlighting the uneven nature of the company's recovery.
Guidance and Market Expectations
Looking ahead, management provided first-quarter revenue guidance in the range of $2.2 billion to $2.4 billion, with a midpoint indicating sequential growth of 12.4%. Adjusted EPS is expected to be between $1.85 and $2.05, also above the most recent quarter's results. CEO Jim Anderson described customer demand as "exceptional" and noted that multiple new growth platforms are beginning to scale. The company plans to double its in-house indium-phosphide production by the end of the year, with further expansion planned for 2027.
However, investors had anticipated even stronger results, especially when compared to competitor Lumentum Holdings (NASDAQ: LITE), which posted revenue growth of 109% and an adjusted operating margin of 36.6%. Coherent's revenue growth of 33.8% and margin of 21.8% appeared less impressive by comparison, even though Coherent operates at a larger scale. This has led to a divergence in analyst price targets, reflecting optimism about optical demand but differing views on valuation and cash flow generation.
Balance Sheet Strength and Risks
Coherent maintains a solid balance sheet with $1.99 billion in cash and short-term investments, and long-term debt was reduced by 8.1% to $3.21 billion. However, the company's continued growth depends on its ability to manage working capital, access fresh equity, and execute effectively. Key risks include the possibility that AI clients could postpone purchases after Coherent's inventory and capacity expansion, or that competition and dependence on a limited customer base could impact future results.
Premarket trading on Friday showed only a slight recovery, indicating that investors are seeking proof that deliveries will surpass the rise in inventories. The upcoming quarter will be critical for Coherent to demonstrate that its growth can translate into improved cash flow, addressing the concerns that led to the post-earnings selloff.
