RIDE - Coherent Stock: Beware Of Monster Rally

2023-06-16 12:52:33 ET

Summary

• Coherent stock is up for unexplained reasons.
• New products on the horizon fail to rationalize weekly stock gain.
• Beware of backlog growth and revenue miss next quarter.

When Lumentum ( LITE ) posted weak quarterly results, the post-earnings selloff did not last. I incorrectly assumed that LITE stock rose on momentum buying for companies loosely associated with artificial intelligence infrastructure investing. Currently, Nvidia ( NVDA ) and Super Micro ( SMCI ) lead that rally.

Coherent's ( COHR ) two-day rally buoyed Lumentum. COHR stock is the biggest mover today . Why did the stock rise by 10% in pre-market, then up by 7.6% at the time of this article?

Coherent advertises its innovations and breakthrough technologies as offering efficiency for its customers through diversified applications . It has a wide reach in industrial, communications, electronics, and instrumentation markets. News that Coherent will offer the PowerLine FL series sent the stock to $54.17.

The positive sentiment contrasts with the bearishness on May 10. Last month, the company's huge Q3 top and bottom consensus miss caught shareholders off guard. It failed to warn investors by pre-announcing the weak results. Skeptical readers cannot assume that a short squeeze is fueling today's rally. The short float is 6.4% . Still, speculators are trying to refuel the bubble in busted electric vehicle firms. Lordstown ( RIDE ) has a short interest of ~ 18% . Nikola ( NKLA ) gained 76% in the last week on a 20.61% short interest .

Speculators forgot that Nikola received a de-listing notice on May 25, 2023.

Prospects of PowerLine FL Series

Coherent's PowerLine FL series is a fiber laser subsystem, touted as cost-effective and simple to operate. Customers require the product for precision welding and cutting. It's effective due to its low energy usage , which ranges from 200 W to 1500 W. Investors may only speculate at this time what the laser welding tasks in e-mobility, consumer electronics, and medical devices are worth.

Prospective investors may find some clues of the PowerLine product line's addressable market from the conference call.

Coherent Q3 2023 Results

In the third quarter, Coherent posted revenue growing by 49.8% year-over-year to $1.24 billion. The backlog grew at a healthy pace of 23% Y/Y to $2.6 billion. Earnings per share of 58 cents, on a non-GAAP measure, missed expectations by 24 cents.

In its reconciliation of GAAP segment operating income , Coherent reported share-based compensation of only $6.9 million. Amortization and integration costs were $17.3 million. In the footnote, the firm flagged transaction fees and financing of around $39 million for the nine months ended March 31, 2023. In a healthy economy, the big acquisition of II-VI for $6.2 billion would pay off. Coherent said last year that the combined company would serve a fast-growing total addressable market of $65 billion.

In a recessionary market, growing revenue from the promised TAM takes longer to achieve. Chairman and Chief Executive Officer Vincent Mattera said that "while June was traditionally legacy II-VI's strongest quarter, the macro factors we are experiencing, along with seasonality, will result in lower revenues sequentially."

Backlog

Coherent started Q3 with optimism based on a strong backlog. As the quarter progressed, the firm faced a sudden and unexpected deceleration in revenue. It realized in the second half of Q3 that larger customers would delay their scheduled shipments. This had a negative impact on Coherent's network segment revenues.

CEO Mattera said that customers changed their ordering patterns, taking advantage of shorter lead times. Still, the PowerLine FL series announcement might spur customer orders. However, this is highly speculative. Customers may retain or grow their backlog from here.

In Q3, customers did not cancel orders. Instead, they pushed out their orders, hurting Coherent's revenue visibility to a range of 13 to 26 weeks instead.

Per seeking alpha's quant rating, Coherent is still rated a "hold. " After the stock rallied, the momentum grade improved. To sustain its current stock price, the firm needs analysts to revise its EPS estimates higher.

This is unlikely, since not a single analyst raised their estimates in the last year:

Risks

CEO Mattera said that the bottoming phase will last into the fiscal year of 2024. The executive did not forecast when the business inflection point takes place.

Investors, including this author, who watched the stock will fear missing out. The strong rally from below $28 to over $50 rewarded those who set a buy zone and acted on it.

Your Takeaway

Investors should treat the rally with extreme caution. The product announcement is not a game-changing event. Until Coherent raises its guidance, expect the firm to potentially miss expectations in the next quarter.

Customers have yet to resume their orders. Any drop in backlog will send the stock to new lows.

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