Corning Shares Fall Despite Q1 Beat, New AI Supply Deals

Corning shares pulled back Tuesday despite the glassmaker reporting better-than-expected earnings and announcing two new long-term supply agreements to support AI infrastructure initiatives. The stock's massive advance this year set a high bar for these results, but the long-term story is still intact. Core revenue in the three months ended March 31 rose 18% year over year to $4.35 billion, topping the consensus estimate of $4.26 billion, according to LSEG. The growth was led by its AI and solar businesses. Adjusted earnings per share (EPS) rose 30% to 70 cents, a penny ahead of expectations, LSEG data showed. Shares of Corning fell more than 7% on Tuesday to roughly $156 apiece. At the lows of the day, the stock briefly traded below $150. Bottom line We're not at all surprised to see this kind of market reaction Tuesday. It was almost a given considering the incredible run Corning shares had going into the print, up 92% year to date as of Monday's close. It is why we said Monday that anyone who wants to trim the stock should go right ahead. "If you wanted to take profits in [Corning], I would do that," Jim Cramer said on Monday's Morning Meeting, adding: "It's a very overhyped stock at this very moment." Thankfully, the price action on Tuesday is relieving some of that hype. It's a gift for the investors who have yet to start a position in Corning. Corning's results admittedly weren't perfect, so why are we so encouraged? The main reason: The company has finalized two more long-term supply agreements that are "similar in size and duration" to its previously announced deal with Meta Platforms. That agreement, announced ahead of earnings back in January, is worth up to $6 billion through 2030. Corning didn't disclose the names of these two hyperscalers, with CEO Wendell Weeks saying it's up to the customers to publicly discuss their supply-chain commitments. Still, he said, "These deals are very significant, and they share the risk and rewards of the required expansions with our strategic customers." We're pleased to see this structure, which was also used in the Meta deal, because it means Corning isn't taking on all the risk associated with investing in new production capacity. In other words, Corning isn't adding new production lines before a customer has been secured. They're investing with a higher degree of confidence. And that should help quell any investor concerns about the wisdom of capacity expansion. This is a company that clearly learned its lesson from the speculative fiber-optics boom of the dot-com bubble. As mentioned, there was some weakness under the hood, such as a miss on operating margins, and revenue guidance for the current quarter did come in a bit light. Nevertheless, the stock can be bought Tuesday because these deal announcements make it even clearer that Corning is a critical player in the trillion-dollar-plus AI infrastructure buildout. As AI systems become more advanced and society adopts technology like self-driving cars and other zero-room-for-error applications, latency and data integrity will become increasingly important. That's where Corning's optical solutions come into the fold, replacing copper wires as the means to transmit data. Optical technology is more capable of handling the required data transfer speeds and the longer distances that data needs to travel in modern AI data centers. That's how you get Corning's Optical Communications segment rising an impressive 36% year over year in the quarter. There is more to like, though. We're seeing a new growth opportunity emerge in solar, with revenues growing 80% year over year. Though the segment remains small versus Corning's existing optics and other glass businesses, it is becoming an increasingly important part of the company's growth story. The announcement of the two new supply agreements serves to verify and solidify the stock's move this year. Plus, the company's planned investor day next week in New York, where it's going to provide a refreshed multiyear growth outlook, should give the market increased confidence in financial estimates later into the decade. For that reason, we're reiterating our $180 price target, and we do believe investors without a position can start a small one Tuesday. We're keeping our 2 rating for now, though, given there's a long week of earnings ahead, especially Wednesday night when four hyperscalers report (Amazon, Alphabet, Meta and Microsoft). Their results will surely influence how the broader AI trade acts in the coming days. So, for now, we are going to monitor the action and look for more details at next week's investor event, in hopes of finding a better opportunity to upgrade shares back to a 1. Commentary Digging into the results, the top-line beat was driven by strength in Optical Communications, which was up 36% year over year to $1.85 billion. On a sequential basis, the segment saw 9% growth from $1.7 billion in the fourth quarter. Additionally, the Solar segment expanded 80% to $370 million. For the total company, this marks the eighth consecutive quarter of year-over-year sales growth. Tuesday marked the first time that Corning reported a Solar segment, so expect it to garner increased attention going forward. The business had previously been reported in a segment called Hemlock and Emerging Growth. "We've advanced the business to the point that it now warrants its own segment, which will include our solar and semiconductor polysilicon sales, as well as our wafer and module businesses," CFO Edward Schlesinger said. Though it remains small, management has previously stated its intention to grow this into a $2.5 billion revenue opportunity. Corning is investing in capacity expansion to support that growth. Some of it is already up and running, benefiting the first-quarter Solar numbers. As Corning moves past some of these start-up investments to scale the business, growth and profitability should both improve. Corning targets a 20% corporate operating margin target, and Weeks emphasized that the Solar segment will get there. Glass Innovations is another new reporting segment for the company, with the team now combining results from the previously separately reported Display and Specialty Materials segments. In the first quarter, its sales were up a modest 1%. This unit is home to a collection of businesses serving industries such as consumer electronics. In other words, it's where we'll find its sales to Apple for the iPhone and Apple Watch glass, among other customers. "These businesses share core technologies, manufacturing capabilities, and market access, and we have aligned them under a unified management structure to increase operational flexibility, improve efficiency, and strengthen our leadership positions in the markets we serve," Schlesinger said. Guidance For the current quarter, management forecasts core sales growth of about 14%, resulting in revenue guidance of about $4.6 billion. That compares to the LSEG consensus of $4.63 billion. Core earnings are expected to be between 73 cents and 77 cents per share. The midpoint of that range is in line with the 75-cent LSEG compiled estimate. Notably, the team has factored in an additional $30 million expense for the quarter due to an extended maintenance shutdown at a solar facility. We'll get an updated look at Corning's Springboard growth initiative next week. The company's Springboard targets have thus far been through 2028. But management plans to extend its outlook through 2030 at the investor day. The team also plans to introduce a new platform targeting the buzzy photonics market inside data centers. They're calling it a "Photonics Market-Access Platform" designed to serve generative AI original equipment manufacturers. We're looking forward to getting more details on its exact nature.