Coherent (COHR.US) shares tumbled nearly 20% on Thursday following its earnings release, as some investors opted to stay on the sidelines due to concerns over the company's data communication business market share. However, most institutional analysts remain optimistic about the company's long-term outlook, maintaining or raising their target prices and ratings.

Needham analyst Ryan Koontz's team noted in their investor report that while Coherent's first quarter revenue is expected to grow 15% year-over-year, this growth rate appears lackluster compared to peer Lumentum's (LITE.US) 6% growth in its network business. Nevertheless, given the continued long-term favorable industry factors, the firm slightly raised its fiscal 2026 earnings per share forecast while lowering revenue expectations, maintaining a "Buy" rating with a $120 target price.

B. Riley Securities analyst Dave Kang focused on network business details, noting that the segment's revenue grew 5% sequentially to $945 million, with data communication (Datacom) business up 3% sequentially, down from 11% in the third quarter. While management attributed the growth deceleration to quarterly fluctuations, B. Riley believes other factors may be at play - referencing Fabrinet's (FN.US) mention in early May of "weak NVIDIA (NVDA.US) demand due to product transitions." As Coherent serves as a major supplier of 800G optical modules to NVIDIA, the company may similarly face demand pressure from NVIDIA. Based on this analysis, B. Riley maintained a "Neutral" rating while raising the target price from $77 to $85.

Stifel analyst Ruben Roy's team focused more on the company's operational optimization efforts. They highlighted that Coherent is improving profit margins through cost reduction, sales expansion, and pricing optimization measures. A notable example is the $400 million sale of its aerospace and defense (A&D) business to Advent International, with proceeds to be used for debt reduction and earnings per share enhancement. This transaction is expected to close this quarter.

Additionally, Stifel believes Coherent's 6-inch wafer fabrication facility under construction in Sherman, Texas, will further drive margin improvements. The facility will begin producing InP wafers in August, and as capacity ramps up, both costs (through improved utilization) and output (through larger wafer sizes) are expected to benefit in the long term. Based on these factors, Stifel reiterated its "Buy" rating, raising the target price from $100 to $118, and forecasting adjusted gross margins of approximately 40.5% for fiscal 2027.

Raymond James analyst Simon Leopold's team took a more bullish stance, reiterating their "Strong Buy" rating and raising the target price from $120 to $134. They pointed out that while intense market competition has led to market share shifts, capacity remains the core constraining factor. Current guidance suggests data communication sales will grow $50-100 million sequentially, a forecast that appears conservative but may yield better actual results. More importantly, the firm believes Thursday's stock decline was an overreaction, as data center/data center interconnect (DCI) demand trends remain robust and are expected to continue through 2026.

Affected by Coherent's stock performance, peers Lumentum and Fabrinet also declined 4.67% and 4.52% respectively at Thursday's close. The market is closely monitoring how demand fluctuations in the data communication sector will impact the optical module supply chain going forward.