Coherent (COHR): NVIDIA's $2B Bet on Optical Networking's Moment

Optical networking has spent years as a niche corner of the semiconductor industry. CSI makes the case that the moment for companies like Coherent may have finally arrived — and NVIDIA's two-billion-dollar equity investment in the company suggests the largest chipmaker in the world agrees.

Coherent (COHR), is an integrated device manufacturer and base materials supplier specializing in indium phosphide and silicon carbide wafers. Under CEO Jim Anderson, who pulled off a similar business transformation at Lattice Semiconductor, Coherent has been shedding non-core assets and sharpening its focus on data center and communications, which now represents seventy-five percent of revenue and posted forty-one percent year-over-year growth in the most recent quarter. Pro forma revenue growth came in at twenty-seven percent, with gross margins approaching the forty percent threshold that marks a key milestone for IDM-class businesses.

The divestitures tell the story of the transformation: a four-hundred-million-dollar sale of the aerospace and defense laser business to private equity, and a fifty-one-million-dollar exit from a materials processing tools segment that was diluting margins. What remains is a tighter, faster-growing business positioned at the intersection of AI data center infrastructure, optical connectivity, and advanced materials.

The NVIDIA investment is the centerpiece of this episode. With free cash flow running deeply negative as Coherent scales manufacturing capacity for co-packaged optics and near-package optics expected in the second half of 2026, the company needed capital. NVIDIA needed the optical components. The result was a cash-for-equity arrangement that Nick describes as a more direct version of the warrant-based incentive deals seen at companies like AMD and STMicro, cheaper than diluting shareholders, and cheaper than going to a bank.

The silicon carbide segment also draws attention, with five-hundred-million-dollar anchor investments from Denso and Mitsubishi Electric secured when silicon carbide was out of favor, now pointing toward three-hundred-millimeter wafer applications for AI data centers and power grid infrastructure.

Q3 guidance calls for revenue between 1.9 and just over 2 billion, gross margin at roughly 41%, and continued negative free cash flow as manufacturing scale-up accelerates. CSI compares Coherent to peer Lumentum — framing COHR as the value play and Lumentum as the momentum play — and confirm they are happy holding both.

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