Coherent-NVIDIA Pact Drives AI Optics: Valuation Warning

Coherent will deliver high-speed optical transceivers and lasers for NVIDIA's AI infrastructure, targeting 800G and 1. 6T speeds. This collaboration taps into surging demand for optical interconnects in AI clusters, where bandwidth bottlenecks threaten performance.

The pact signals NVIDIA's commitment to optical connectivity as AI models scale, driving revenue visibility for Coherent. However, the stock now trades at over 30x forward earnings, above its five-year average of 22x. Growth must accelerate to justify the premium, especially amid competition from Lumentum and II-VI.

Coherent's AI optics revenue could double in fiscal 2025, but gross margins face pressure from rising R&D costs. NVIDIA's ecosystem dominance provides a moat, yet any shift in its supply chain strategy poses risk. The market prices in perfection, leaving little room for execution missteps.

Power Move: Coherent's NVIDIA deal locks in AI optics growth, but valuation leaves no safety margin. Investors should watch Q3 earnings for margin expansion—if gross margins don't improve, the stock may re-rate downward. The real power play is betting on optical adoption, not just this partnership.

This article was edited with AI assistance for readability. Read original here.