Coherent (COHR) provides the sensors and lasers that unlock phones, vacuum homes and retrieve images from outer space. But it is the adoption of artificial intelligence technology that is driving the company's financial turnaround — and robust demand for Coherent stock — by opening up new avenues of rapid growth for the AI player.

Coherent makes optical circuit switches for AI data centers, as the growth of artificial intelligence and machine learning, or ML, technologies creates intense needs for data processing. AI chip titan Nvidia (NVDA) is one of Coherent's transceiver customers.

On Nov. 6, Coherent crushed earnings views for its fiscal first quarter ended Sept. 30 as sales jumped 28%, led by AI demand. The company's outlook was mixed. While it declined an interview request, Coherent noted what drove demand in a press release.

"We delivered solid growth in the September quarter on both a sequential and year-over-year basis, driven primarily by our AI-related Datacom transceivers," the company said.

Coherent has said in the past that initial demand surge for its high-speed transceivers came in fiscal fourth quarter of 2023, ended in June, when AI began to soar in popularity.

"We have seen strong follow-on orders for our AI/ML-related datacom transceivers, which has driven a significant increase in our backlog," Coherent management said in a November 2023 letter to shareholders.

AI Stock Nvidia Driving Broad Demand

On a basic level, Coherent's sensors and lasers enable such tasks as navigation in optical computer mice, body tracking in gaming consoles, facial recognition in smartphones and tablets, and driverless functions in autonomous vehicles.

Its advanced sensors serve as the "eyes and ears" of an AI-driven world, management says.

The first-quarter report marked the second earnings release issued under semiconductor industry veteran Jim Anderson, who took the helm as Coherent's chief executive in June. A portfolio review that began the same month has concluded, Anderson revealed on the Nov. 6 earnings call.

The debt-laden company is streamlining operations after an acquisition spree. It plans to invest in higher growth and higher margin businesses, such as next-gen transceivers.

Execution will be key to the next leg up for the AI stock, analysts say.

Coherent Stock In Buy Range

On Nov. 8, Coherent shares hit an all-time high after the first-quarter earnings beat. But it pulled back amid news that an analyst day will not take place until May 28.

A bounce off support at the 50-day/10-week moving average offers a new entry. Investor's Business Daily sees an exact buy point at 97.35. The chase zone stretches to 102.20.

However, recent volatile action shows a need for caution. The relative strength line also does not show a clear uptrend in the shorter term. Further, Coherent stock has already rallied massively, which could limit the potential for future gains.

Over the past year, the AI stock has nearly tripled, vaulting 180%. That almost keeps pace with a 187% gain for Nvidia, a Leaderboard stock and IBD 50 component, over this period.

Investors who bought shares as they cleared an 80.80 cup-with-handle buy point in September could choose to take profits. Coherent stock is up 25% from that entry.

The MarketSurge chart shows several weekly gains in big volume since summer of 2023, when the current AI cycle began. Coherent shares boast four quarters of rising fund ownership and an up/down volume ratio of 1.5, which are positive signs.

Sharp Earnings Acceleration

For the three months ended Sept. 30, Coherent delivered a 363% leap in earnings per share as sales surged 28%. That marked the second consecutive quarter of growth for both the top and bottom lines, following several quarters of declines.

Moreover, earnings growth accelerated sharply from 49% in the June quarter. The sales gain sped up from 9% on a sequential basis.

The company said its AI-related transceiver business drove revenue growth and margin expansion. That offset weakness in industrial, electronics and instrumentation markets.

Coherent's high-speed optical transceivers can be found in Nvidia's NVLink, which are used in AI supercomputers for data centers.

"Overall, this quarter was a solid step forward as we await more details on the company's financial transformation," Susquehanna analyst Christopher Rolland wrote in a recent note to clients. The firm maintained a buy rating on the AI stock, while hiking its price target by $5 a share to a Street-leading $125.

Analysts now expect Coherent's earnings to jump 81% for fiscal 2025 ending in June and another 46% for fiscal 2026. That would break a three-year earnings slump.

During its first quarter, Coherent reduced debt by $118 million using proceeds from asset sales, with $3.9 billion remaining on the balance sheet.

Growing Markets, Financial Transformation

Founded in 1971, the company targets four growing markets: industrial, such as electric-vehicle batteries and medical devices; communications, including cloud computing and AI; electronics like wearable devices and automobiles; and instrumentation that includes medical lasers and imaging.

Combined, those four divisions tapped a $64 billion total addressable market in 2023. It is one that should grow by 14% annually over the next five years, according to a new investor presentation by the company.

Over this same five-year period, the AI transceiver market is expected to surge 44% annually to reach $11 billion, a company investor presentation from November 2023 shows, citing both LightCounting and internal estimates.

On Nov. 7, Susquehanna analyst Rolland wrote that he expects new leadership to refocus on areas of profitable growth, including next-gen AI-related transceivers.

"This important combination of top-line acceleration, product optimization and debt paydown has the ability to increase the company's net margins more than 1,000 basis points over time," Rolland said. That would take it from around 5% today to 15%.

Mixed Outlook For Coherent Stock

While multiples seem rich, Rolland called them justified, given historical levels. He also cited growth opportunities and improving profit profile "as AI continues to upside."

However, Morgan Stanley analyst Meta Marshall warned that the company's first-quarter results show "an encouraging 5K, but investors are already at the half-marathon marker." Citing challenges in many parts of the business, the analyst maintained an equal-weight rating on Coherent stock, with a $100 price target, which is right where shares currently trade.

Meanwhile, analyst Mike Genovese at Rosenblatt Securities said he sees Coherent "as the No. 1 beneficiary of AI transceiver demand over time." But he warned that market and supply challenges over the next few quarters could keep shares rangebound.

The analyst has a hold rating on shares and $105 price target. He rates Fabrinet (FN) and Lumentum (LITE), both of which also target the AI transceiver market, as buys.

Alongside Lumentum, Coherent names Broadcom (AVGO), Wolfspeed (WOLF) and Idex (IEX) among its many rivals.

Against its competitors, Coherent stock may have an advantage when it comes to any possible new China tariffs imposed by President-elect Donald Trump, analysts say. They cited a large global footprint, including factories in Malaysia.

Please follow Aparna Narayanan on X @IBD_Aparna for more coverage.

YOU MAY ALSO LIKE:

Best Growth Stocks To Buy And Watch: See Updates To IBD Stock Lists

Looking For The Next Big Stock Market Winners? Start With These 3 Steps

Join IBD Live And Learn Top Chart Reading And Trading Techniques From Pros

Learn How To Time The Market With IBD's ETF Market Strategy