Coherent Corp. (COHR) shares continued their decline on Wednesday, slipping nearly 1% to $378.85, even after the U.S. Department of Commerce awarded the company up to $50 million in direct funding through the CHIPS Program Office. The grant is intended to support the expansion of Coherent's indium phosphide (InP) semiconductor manufacturing facility in Sherman, Texas, a key site for producing photonic components used in AI data centers.
The stock's modest drop follows a more pronounced 6.2% slide on Tuesday, suggesting that investors remain cautious despite the federal backing. The funding, announced via a letter of intent, aims to bolster domestic production of InP wafers, which are critical for high-speed optical links that enable efficient data transfer in AI infrastructure. Coherent plans to double its manufacturing space and quadruple wafer output at the Sherman site, while adding over 1,000 jobs, including more than 550 advanced manufacturing and engineering roles.
Valuation Concerns and Supply Risks
Analysts point to Coherent's elevated valuation as a key headwind. The stock trades at 48.27 times forward earnings, more than double the group average of 21.76, according to data cited by TradingKey. This premium comes despite a staggering 434.9% surge in share price over the past year, far outpacing the Technology Select Sector SPDR ETF's 60.4% gain. While analysts maintain a "Strong Buy" rating, the average price target of $372.21 sits below the current trading level, signaling limited upside in the near term.
Supply chain disruptions add another layer of uncertainty. China has tightened export licenses for indium phosphide since February 2025, driving the average price of a 6-inch InP wafer up 250% to $5,000. Konrad Wang, a research analyst at SemiAnalysis, noted that these restrictions "ripple through the entire optical supply chain." Paul Triolo of Albright Stonebridge described the move as part of a broader "materials chokepoint" strategy, which could constrain Coherent's ability to scale production as planned.
Deepening Nvidia Ties
Coherent's expansion is closely linked to its collaboration with Nvidia Corp. (NVDA), which has committed $2 billion to Coherent and Lumentum for AI infrastructure upgrades, as reported by Reuters in March. The Sherman plant will produce laser material for chips that interconnect within AI systems, a critical component for reducing heat and energy loss compared to traditional copper wiring. Nvidia CEO Jensen Huang described AI factories as "the infrastructure of the new industrial revolution," underscoring the strategic importance of Coherent's photonics technology.
Coherent CEO Jim Anderson echoed this sentiment, calling semiconductor photonic devices "essential building blocks of AI infrastructure." Bill Frauenhofer, executive director for semiconductor investment and innovation at the Commerce Department, emphasized that InP photonics are "essential for enabling high speed data transmission" across AI, telecom, and advanced networks.
Market Outlook and Key Players
The broader optical supply chain remains tight and targeted, with AXT Inc. and Japan's Sumitomo Electric leading in InP substrate supply. Coherent's grant is part of a broader push by Washington and Nvidia to secure U.S.-based photonics manufacturing for AI data centers. However, the timing of the ramp-up and margin sustainability remain under scrutiny, given the stock's premium valuation and geopolitical risks.
Investors are now focused on how quickly Coherent can convert its expanded capacity into profits, especially as AI optics demand accelerates. The company's ability to navigate supply constraints and maintain margins will be critical in justifying its current market price.
