Coherent is a strong investment due to its leading position in 6-inch indium phosphide wafer production and capacity expansion, though it carries risks from high spending and potential demand slowdown.

Coherent, ticker symbol CHR, which found a way to make four times more lasers out of every wafer at half the cost.

Coherent and Lum also share some serious risks. First, neither of them make their own raw materials. Second, if hyperscaler spending does slow down, both of these stocks will get hit hard.

data centers account for more than 70% of Coherence revenues. And the third big risk is that indium phosphide shortages and supply constraints mean that both companies have to spend more in order to scale aggressively and they need to do it while demand is hot.

So any construction or production delays hurt them twice as bad. That means today's winners could quickly become tomorrow's losers. Coherent reported $2 billion in revenue last quarter, which is up 34% year-over-year with gross margins of 38.5%, which is almost 3 points higher than last year.

For the full fiscal year, their adjusted earnings came in at $5.61 per share versus $353 the year before. That's 59% earnings growth year-over-year.

Coherence data center and communication segment generated $5.3 billion of their 7.1 billion in revenues over the last year, while their older industrial laser business actually shrank.

One special thing about Coherent is that they're vertically integrated. They make their own laser chips, package them into optical engines, and build the finished 800G and 1.6 TBTE transceivers that those chips go into.

Coherent moved their production to 6-in wafers, which lets them make four times more chips at roughly half the cost. Coherent CEO pointed out that their yields are actually higher on their 6-in lines across every single product that they make on them.

Coherent expects to double their indium phosphide output by the end of this year and then double it again by the end of 2027.

Coherent spent $1.1 billion on capex over the last year versus about $80 million in cash from operations. That means they spent roughly $14 on chip production for every $1 they actually made.

Their management team says that investments into data center chip production have an average payback period of about 18 months. As an investor, I really like Coherent's full stack approach to optics.

being backed and partly owned by Nvidia lowers the risk of all that spending over the next few years.

If I could only pick one, I'd still pick Coherent because they built the world's first production line for 6-in indium phosphide wafers and they're on track to quadruple their capacity by the end of next year.

Just remember, they're spending $14 for every dollar they actually generate to do it.