Summary of J.P. Morgan Research on AI Data Center Opportunities Industry Overview - The report discusses the expanding demand for AI data centers and the associated networking technologies, particularly focusing on the data center interconnect (DCI) market, which is estimated to have a total addressable market (TAM) of over $10 billion [1][13]. Key Concepts - **Scale-Up**: Refers to XPU-to-XPU connectivity within a tightly coupled node or local cluster. - **Scale-Out**: Involves the fabric linking multiple nodes across racks and pods within a single data center. - **Scale-Across**: Focuses on enabling distributed training between geographically separated data centers. - **Multi-Rail**: Increases fiber density to expand DCI capacity and support new use cases [1]. Market Opportunities - The report estimates that Scale-Across and Multi-Rail opportunities could represent a combined TAM of over $10 billion for the DCI market, matching the current DCI TAM [1]. - A specific example of Scale-Across involves a U.S. hyperscaler interconnecting two data centers over approximately 100 km, enabling 20-25 Pb/s of aggregate AI training traffic [5][7]. Financial Projections - The DCI content for Scale-Across opportunities could range from $300 million to $500 million per DCI connection, excluding optical fiber cable and connectors [11]. - The revenue opportunity per DCI connection is broken down as follows: - **Coherent Pluggable Modules**: 55,000 units at an ASP of $4,000 to $6,000. - **Reconfigurable Line Systems (RLS)**: 860 units at an ASP of $20,000 to $50,000. - **Ethernet Switches**: 1,720 units at an ASP of $700 to $1,000 [11][12]. Company Positioning - Companies best positioned for the DCI opportunity include: - **Networking**: Arista and Cisco. - **Optical**: Ciena, Coherent, Corning, Fabrinet, and Lumentum [15]. Infrastructure Challenges - Increasing fiber density requirements are driving the need for innovation in existing infrastructure rather than simply adding more equipment [17]. - Traditional in-line amplifier (ILA) huts are becoming bottlenecks due to their limited capacity, necessitating the development of multi-rail technology to increase fiber pair capacity from 16 to 128 or even 256 pairs [23][33]. Future Projections - Lumen's ambitious plan to expand its network fiber miles from 12 million in 2022 to 47 million by 2028 could represent a significant opportunity, with an estimated total revenue opportunity of $200 million to $300 million for the incremental Lumen opportunity alone [29][33]. Conclusion - The report highlights significant growth potential in the AI data center market, driven by technological advancements and increasing demand for high-capacity interconnect solutions. Companies involved in networking and optical technologies are well-positioned to capitalize on these emerging opportunities [1][15].

Core Insights - Coherent Corp.'s stock price has increased by 60.9% over the past year, significantly outperforming the industry growth of 5.7% and the S&P 500 Composite's rise of 16.6% [1] - The company has also outperformed peers such as Byrna Technologies and Industrial Tech Acquisitions, which saw declines of 0.9% and 11%, respectively [1] Stock Performance - Over the past month, Coherent's stock has risen by 12.4%, surpassing the slight dip of Industrial Tech Acquisitions and the 10.9% growth of Byrna Technologies [4] Growth Catalysts - The AI datacenter business has shown strong demand, with a 23% year-over-year revenue increase in the first quarter of fiscal 2026 [5] - The CEO indicated broad adoption of 800G and rapid adoption of 1.6T transceivers, expecting significant growth in these products in 2026 [6] - The production yield of 6-inch indium phosphide (InP) is higher than that of 3-inch InP, with plans to double internal production capacity in 2026 [7][8] - The Optical Circuit Switch (OCS) platform is projected to add over $2 billion in addressable market opportunity, with sequential revenue growth expected [9] - Demand for ZR/ZR+ DCI-focused products, including 100G, 400G, and 800G transceivers, is anticipated to continue growing [10] Financial Position - As of September 2025, Coherent held $875 million in cash reserves against a current debt of $48 million, indicating strong liquidity [11] - The current ratio was 2.33, up 6.4% from the previous quarter, exceeding the industry average of 1.54 [11] Revenue and Earnings Outlook - The Zacks Consensus Estimate for fiscal 2026 revenues is $6.7 billion, reflecting a 15.2% year-over-year growth, with fiscal 2027 expected to grow by 14.6% [13] - The consensus estimate for fiscal 2026 EPS is $5.02, indicating a 42.2% year-over-year growth, with fiscal 2027 EPS expected to increase by 25% [13] - Over the past 60 days, there have been upward revisions in EPS estimates for both fiscal 2026 and 2027, highlighting analyst confidence [14] Investment Recommendation - Coherent is positioned for rapid growth in 2026, driven by demand for 800G and 1.6T transceivers, advancements in InP production, and the OCS platform [15][16] - The strong balance sheet and positive growth outlook suggest that investors should consider buying the stock for potential long-term returns [17]

Core Viewpoint - Coherent has achieved a significant milestone with its next-generation 300mm silicon carbide (SiC) platform, aimed at meeting the increasing thermal efficiency demands of artificial intelligence data center infrastructure [2]. Group 1: Technology and Innovation - The new 300mm solution is developed to address the growing thermal load and performance scalability needs of modern data centers, leveraging Coherent's established 200mm platform technology [2]. - The platform's conductive SiC substrate features low resistivity, low defect density, and high uniformity, enabling low power consumption, high frequency, and good thermal stability [2]. - The technology is also applicable in AR/VR devices and power electronics, allowing for the production of thinner, more efficient waveguides for immersive display modules [2]. Group 2: Market Impact - The 300mm platform solidifies Coherent's leadership in wide bandgap semiconductor materials, facilitating innovation in data centers, optics, and power applications [3]. - The transition to 300mm wafer size allows for more devices per wafer and reduces the cost per chip, supporting applications in electric vehicles, renewable energy systems, and industrial automation [2].

Core Insights - The article highlights the growing importance of drone technology across various industries, emphasizing its evolution from basic operations to advanced missions, making drones essential tools [1] Group 1: Company Profiles - **AeroVironment Inc. (AVAV)**: Specializes in unmanned aircraft systems and efficient energy systems, serving primarily U.S. Department of Defense agencies. The company anticipates over 100% revenue growth and 10.4% earnings growth for the fiscal year ending April 2026 [5][7][8] - **Coherent Corp. (COHR)**: Focuses on breakthrough technologies across various markets, including industrial and communications. Expected revenue growth is 15.2% with earnings growth at 42.2% for the year ending June 2026 [9][10] - **Trimble Inc. (TRMB)**: Benefits from strong recurring revenue growth and digital adoption, particularly in its AECO and Field Systems segments. The company projects revenue growth of 6.9% and earnings growth of 11.1% for the next year [11][13] Group 2: Market Position and Growth Potential - AeroVironment's expected growth rates indicate a strong market position, particularly in defense-related applications, with a consistent earnings estimate over the past week [6][7] - Coherent's recent earnings estimate has improved by 9.6%, reflecting positive market sentiment and growth potential [10] - Trimble's focus on software-driven revenue and AI solutions positions it well for future growth, supported by a robust patent portfolio [12]

Core Thesis - Coherent Corp. is positioned for significant growth, with the market yet to fully recognize its potential, as evidenced by its recent performance and operational strength [1][2][6]. Financial Performance - The company has achieved ten consecutive double-beats over more than two years, indicating consistent outperformance [3]. - Gross margins are approaching 40%, and operating margins are nearing 20%, reflecting improved profitability [3]. Market Dynamics - Demand visibility has significantly expanded, with constrained supply in critical optical and laser segments reducing execution risk [4]. - The industrial-laser segment, which has historically underperformed, is expected to turn positive in the next quarter, alleviating a long-standing drag on earnings [4]. Competitive Positioning - Coherent's leadership in networking optics sets it apart from competitors like Lumentum and Broadcom, which do not offer the same growth-at-a-reasonable-price (GARP) profile [5]. Growth Potential - Analysts have raised the 12-month price target from $200 to $225, with a three-year potential target of $500, indicating the market's underappreciation of the company's growth trajectory [6]. - The combination of strong demand, margin expansion, and operational leverage positions Coherent as an exceptional growth story with both visibility and scalability [6].

Core Insights - Coherent Corp. has achieved a significant milestone with its next-generation 300mm silicon carbide (SiC) platform aimed at enhancing thermal efficiency in AI datacenter infrastructure [1][2] Group 1: Technology Development - The new 300mm SiC solution is designed to handle increasing thermal loads, addressing the performance and scalability requirements of modern datacenters [2] - Transitioning to larger diameter SiC wafers is expected to yield substantial improvements in energy efficiency and thermal performance, crucial for high power density and faster switching applications [2][4] Group 2: Applications and Innovations - While primarily focused on datacenter thermal management, Coherent is also advancing SiC technology for augmented reality (AR) and virtual reality (VR) devices, as well as power electronics [3][4] - The conductive SiC substrates offer low resistivity, low defect density, and high homogeneity, which enhance energy efficiency and thermal performance in next-generation datacenter systems [4] Group 3: Market Position - The 300mm platform strengthens Coherent's leadership in wide-bandgap semiconductor materials, facilitating innovation across various sectors including datacenters, optics, and power applications [5]

Group 1 - Ciena Corp, Coherent Inc, and Lumentum Holdings Inc are analyzed for market performance and investment opportunities [1] - The analysis covers recent financial results, market trends, and competitive positioning of these companies [1] - Key metrics such as revenue growth, profit margins, and market share are highlighted to assess the companies' financial health [1] Group 2 - Ciena Corp reported a significant increase in revenue, driven by strong demand for its networking solutions [1] - Coherent Inc has shown resilience in its financial performance despite market challenges, focusing on innovation and product development [1] - Lumentum Holdings Inc is positioned well in the optical communications market, with a focus on expanding its product offerings and customer base [1]

Industry Overview - The communication technology sector has experienced significant growth, with leading companies in the industry seeing triple-digit percentage increases year-to-date [2] - Prior to the second half of the year, this sector had received little attention compared to semiconductors, quantum computing, and other industries [3] Drivers of Growth - The explosive adoption of Artificial Intelligence (AI) has created a substantial demand for high-speed, scalable optical networking infrastructure [4] - Hyperscalers and cloud giants are rapidly building AI-optimized data centers, leading to a massive surge in orders for communication equipment [4] Company Performance - Ciena Corporation, Lumentum Holdings, and Coherent Corporation are benefiting from this demand, supplying critical infrastructure for interconnecting GPUs used in AI applications [4] - Ciena reported adjusted EPS of 67 cents in Q3, exceeding estimates of 53 cents, and generated $1.21 billion in revenue, also surpassing expectations [7] - Notably, non-telco customers accounted for 53% of Ciena's total revenue, indicating a shift towards cloud providers [7] Market Outlook - The current growth and guidance increases across the sector suggest a multi-year expansion driven by AI, potentially leading to unprecedented revenue and stock price levels [5] - Despite high price-to-earnings ratios, strong forward earnings and expanding margins indicate sustained long-term potential for companies in this sector [8]

Company Overview & Market Position - Vertiv Holdings (VRT) is a global designer and manufacturer of digital infrastructure technologies for communication networks and data centers [2] - Vertiv partners with Nvidia in a high-density reference design for extreme power and thermal requirements of Nvidia's 72 GPU rack scale systems [3] - Coherent Corporation is a global leader in lasers, optics, and photonic components used across various industries including AI [16] - Coherent is emerging as an important player in AI due to the shift towards silicon and photonics-based networking in data centers [15][19] Industry & Ranking - Vertiv Holdings is part of the Zach's Computers IT Services Industry Group, ranked in the top 32% [7] - The top 50% of Zach's ranked industries outperforms the bottom 50% by a factor of more than 2:1 [8] - Coherent has a Zach Rank of 2, driven by analyst upgrades [22] Financial Performance & Estimates (Vertiv) - Vertiv has delivered a 1489% average earning surprise over the last four quarters [9] - Vertiv reported third-quarter earnings of $124 per share, a 24% beat versus the Zach's consensus estimate, with earnings growing 63% from the same period last year [10] - Estimates for Vertiv's fourth quarter have been increased by 323% in the past 60 days [11] - Vertiv's Q4 Zach's consensus estimate now stands at $128 per share, reflecting potential growth of nearly 30% relative to the year-ago period [12] - Vertiv's revenues in the fourth quarter are projected to climb more than 22% to $286 billion [12] Financial Performance & Estimates (Coherent) - Analysts covering Coherent have unanimously upgraded their earnings estimates [22] - Coherent's current quarter estimates have jumped by 8%, next quarter is up by 95% [22] - Coherent's current year estimates have increased by almost 10% over the last 30 days, and next year earnings estimates have risen by 4% [23] - Coherent's sales are expected to grow 15% this year and 145% next year [23] - Coherent's earnings are expected to grow 256% annually over the next three to five years [25] Stock Performance & Valuation - Vertiv (VRT) stock is up nearly 200% off the April lows [12] - Coherent's stock is up approximately 50% this year and has tripled from the April lows from $50 to $161 [26] - Coherent is trading at 327 times forward earnings [25]

Core Insights - Coherent Corp.'s Silicon Carbide (SiC) substrates are essential for enhancing energy efficiency in electric vehicles (EVs), with the global EV market projected to grow at a CAGR of 32.5% through 2030, presenting significant growth opportunities for the company [1][8] Investment and Financial Performance - Coherent secured a $1 billion investment from Denso Corporation and Mitsubishi Electric Corporation in late 2023, which included minority stakes in the SiC business and supply agreements for substrates and epitaxial wafers, enhancing the company's financial flexibility for SiC expansion [2] - The company reported a 17% year-over-year growth in revenue for the first quarter of fiscal 2026, with gross margin expansion of 249 basis points, following a 23% revenue increase and 400 basis points gross margin growth in fiscal 2025, driven by demand from AI-related datacenters and communications [3][4] Competitive Landscape - Despite strong growth indicators, Coherent faces competitive pressure from Cognex and Applied Materials in the battery process equipment sector, which could impact pricing and market share [5][8] Stock Performance and Valuation - Over the past year, Coherent's stock has increased by 58.5%, outperforming the industry average of 11.8% and surpassing Cognex's 4.7% decline and Applied Materials' 39% growth [6] - Coherent trades at a forward price-to-earnings ratio of 29.58X, which is higher than the industry's 25.22X, while Applied Materials and Cognex trade at 26.19X and 34.13X, respectively [10] - The Zacks Consensus Estimate for Coherent's earnings for fiscal 2026 and 2027 has risen by 9.6% and 3.9% over the past 60 days, indicating positive market sentiment [13]