Investment in artificial intelligence data centers is shifting its focus from computing power to data transmission speed. Running tens of thousands of graphics processing units (GPUs) as a single cluster requires ultra-high-speed networks that exchange data between servers without delay. As surging AI traffic drives demand for optical communication components, Coherent has emerged as a key beneficiary.
Coherent holds optical communication network and laser technology, supplying high-performance optical transceivers used in AI data centers. An optical transceiver converts electrical signals into light signals to rapidly transmit large volumes of data. The market is currently facing a supply shortage as it transitions from 800-gigabit (Gbps) products to 1.6-terabit (Tbps) ones. Coherent has secured long-term supply contracts with clients through the end of the 2020s, improving its earnings visibility.
The company is also broadening its product lineup. It is expanding its portfolio into next-generation network solutions, including optical circuit switches (OCS) that directly reroute optical signals, and continuous-wave (CW) lasers. Its Photonlink platform, set to be unveiled in September, is also cited as a new growth driver.
Expanding production capacity is the most important investment point. One of the key bottlenecks in optical transceiver supply is the production of indium phosphide (InP) lasers. Coherent is converting its existing 3-inch wafer process to 6-inch. A 6-inch wafer yields about four times as many chips per wafer as a 3-inch one, so with yields already stable, the company can substantially increase shipments through the process conversion alone. This justifies both earnings momentum and share price gains.
The next-generation co-packaged optics (CPO) market is another opportunity. CPO is a technology that places optical communication components close to semiconductors to boost transmission speed and power efficiency. As major clients accelerate their adoption timelines, related revenue is expected to be reflected in earnest from next year.
Its manufacturing base in the U.S. is also a strength. Coherent has secured more than 20 production facilities across the U.S. Should Washington tighten regulations on Chinese-made optical transceivers or telecom equipment in the future, the company's supply-chain competitiveness could stand out further. As bottlenecks in AI data centers move from GPUs to networks, Coherent's medium- to long-term growth potential is also expected to grow.
