Market volatility can depress the buy-and-hold investor and drive him to poor decisions. Coherent Corp. (COHR) is one of the best examples we can give for why we maintain a five-year, buy-and-hold strategy for our Paradigm Portfolio, highlights George Gilder, editor of Gilder’s Technology Report.
Like most of the semiconductor sector, COHR has shown extreme volatility in recent years. From its 2020 low of circa $25 to its 2021 high of $93, the stock more than tripled. At that time, the company was known as II-VI, before it bought Coherent and decided to go under that name.
(Editor’s Note: George Gilder is speaking at the 2024 MoneyShow Orlando, which runs Oct. 17-19. Click HERE to register)
The merged company had, we observed, two strong winds at its back. The first was its strong position in alternative semiconductor materials, including both silicon carbide (SiC) and gallium nitride (GaN). Both can tolerate higher voltages and more heat than silicon, with SiC especially strong on thermal characteristics.
Coherent Corp. (COHR)
Meanwhile, GaN switches at higher frequencies, making it especially useful as telecom technology moves up frequency. We originally bought II-VI precisely for its “life after silicon” capabilities; we continue to believe such alternative materials will grow in importance.
Mr. Market did get somewhat overenthusiastic about alternatives by overestimating the speed at which electric vehicles (EVs) — many of which use SiC chips for power management — would replace internal combustion. Our view has long been that EVs would eventually dominate but only when supporting technologies — above all, the batteries — were ready.
Instead, premature government subsidies ramped up the EV market before its time. Today, just as the EV bubble looks like it's collapsing, the technology is rapidly improving. We expect the EV market to bounce back just as its political support collapses. Sweet irony.
The second wind at COHR’s back was its long-term leadership in optical transceivers used to move data into, around, and out of hyperscale data centers, a market that has exploded with the advent of artificial intelligence (AI) and high-performance computing. Data center sales have made Nvidia Corp. (NVDA) into a $3 trillion company and COHR is an important player in that market.
Today, we modestly point out that our prediction of a boom in the transceiver market was right on. In its FY’24 Q4 (Calendar Q2) earnings report, the company revealed that its Communications segment, which now accounts for over 50% of total revenue and produces the optical transceivers, rose to $678 million. That was up 189% year-over-year and an increase of 47% from FY’24 Q1.
We recommend reducing your allocation, but holding a remaining position. We may miss a bit of the resulting top, but always remember: “Pigs get fat and hogs get slaughtered.”
Recommended Action: Hold COHR.
