Coherent rallies after investment, B Riley upgrade

Coherent Corp. (NYSE:COHR) was upgraded at investment firm B. Riley amid a $1B investment by two Japanese companies and its artificial intelligence potential.

Shares are up 7% on Wednesday morning.

Analyst Dave Kang raised his rating on Coherent (COHR) to Buy from Neutral with a price target of $51 from $37 as he sees Wall Street — and itself — as having underestimated the company’s silicon carbide, or SiC, business.

On Tuesday, Denso Corporation (OTCPK:DNZOF) (OTCPK:DNZOY) and Mitsubishi Electric Corporation (OTCPK:MIELY) and (OTCPK:MIELF) agreed to invest $500M each for a 12.5% non-controlling ownership in Coherent’s (COHR) SiC business. That business will be separated into a subsidiary, which Coherent (COHR) will control and operate.

The transaction, which is expected to close in early 2024, values the SiC business at $3B, equating to 10 times 2024 revenue, compared to B. Riley's previous estimate of 2 times revenue, Kang said. He is now using a multiple of 7x for the unit.

Kang maintained his estimated 2024 sales related to silicon carbide, which is largely used in electric vehicles, at $264M compared to management’s $300M forecast.

“Our rationale is that shares of Wolfspeed (WOLF), which is the leading supplier of SiC substrates and devices, currently trade at 2.2x revenue even though the multiple was over 11 just a year ago,” Kang wrote in a note.

Wolfspeed (WOLF) shares were up 1.5% on Wednesday.

The transaction will free up the company’s capital to invest in other areas.

800Gs

The firm also said Coherent (COHR) isn’t getting proper credit for its 800G transceiver business, which will be driven by AI adoption.

“COHR, being the industry leader in datacom transceivers, is one of our better AI ideas,” Kang explained.

The ramp up of the second generation of 800G transceivers could be a major catalyst over the next two to three years, Kang said. Management noted that $200M of 800G revenue has not been factored into its 2024 revenue outlook.

Coherent’s (COHR) shares have declined 30% since late June compared to a 0.2% drop in the broader Nasdaq.

B Riley slightly lowered its 2024 earnings estimate from $1.29 to $1.27 per share.

Analysts are largely bullish on Coherent (COHR). It has a HOLD rating from Seeking Alpha authors, while Wall Street analysts rate it a BUY. Conversely, Seeking Alpha's quant system, which consistently beats the market, rates the stock a HOLD.