After a 40% drop from its peak, Morgan Stanley strongly supports Corning: the ramp-up of optical business capacity may become a stock price catalyst in the second half of the year.

Corning will announce its second-quarter results before the market opens on July 28. Morgan Stanley believes that this earnings report is unlikely to deliver a "surprise beyond expectations." The real key to determining the stock's trend lies not in the second-quarter results themselves, but in margin improvement and whether the ramp-up in optical business capacity in the third quarter will accelerate further. With optical capacity near full utilization, the room for Corning's second-quarter revenue to exceed expectations is quite limited. Morgan Stanley expects that the revenue beat is unlikely to exceed $50 million, and the earnings per share beat would only be about $0.01–$0.02. The market's focus will shift to management's outlook on capacity expansion, pricing power, and margin improvement in the second half of the year. It is worth noting that Corning's share price has pulled back by about 40% from its late June peak. Morgan Stanley believes this round of correction has clearly improved valuation, but to restart an upward trend, new catalysts are needed. The expansion of optical business supply will be the most closely watched variable in the second half of the year. Optical Business Supply Constraints: Margins More Worthy of Attention Than Revenue Morgan Stanley believes that Corning's optical business is almost in a state of "demand exceeding supply," with current capacity basically sold out. This means the upside room for second-quarter revenue surprises is extremely limited. Analysts estimate that the chance of revenue exceeding expectations by more than $100 million is very low. To achieve greater earnings flexibility, Corning can only rely on further price increases or early release of new capacity. However, GlassBridge-related opportunities have already been factored into the company’s $10 billion photonics framework, and the market has fully anticipated this positive. Therefore, in this earnings report, the margin performance and management's assessment on the speed of capacity ramp-up in the third quarter are more worthy of attention than the revenue figures. The current consensus forecast includes about $200 million quarter-over-quarter revenue growth, of which the optical business needs to contribute at least $50 million in new revenue. This is based on the assumption that new capacity can be released as planned. Meanwhile, the Glass Innovations business, which accounts for about 30% of core revenue, is still expected to provide certain support. With improving sales of foldable devices, this business has some upward revision potential, although consumer electronics demand remains under pressure due to rising memory prices, which may offset some positives. Solar Business Still Biggest Drag on Margins Compared to the optical business, the solar business remains Corning's largest drag on profitability. Morgan Stanley calculates that the company’s previous second-quarter earnings guidance implied about $0.07 EPS drag, equivalent to a 9% decrease from the guidance midpoint of $0.75. Of this, about $0.03 comes from roughly $30 million in temporary shutdown costs; about $0.04 comes from continued efficiency losses during the silicon wafer capacity ramp-up. The after-tax effect is approximately $61 million, or $75 million before tax. Analysts expect shutdown-related costs could disappear first, and as silicon wafer manufacturing efficiency continues to improve, the cost pressures will gradually ease in the second half. If the recovery pace of the solar business is faster than market expectations, there is room to raise third-quarter earnings guidance further, which could also serve as a key catalyst for the share price. Display Business Benefited from Early Stocking in First Half, Growth May Slow in Second Half In the display business, demand was relatively strong in the first half of the year, mainly due to early stocking by TV brands. Affected by factors such as the Winter Olympics and World Cup, panel plant utilization in the second quarter remained at 80%–85%, basically flat with the first quarter and significantly above last year's level of about 78%. Morgan Stanley believes that industry capacity discipline is still good, which supports glass prices and profitability in the short term. However, much of this demand has been released early. As panel orders normalize in the second half of the year, the demand dividend from concentrated stocking in the first half is expected to fade gradually, and the growth momentum of the display business may also slow. AI Optical Interconnect Remains Core Long-term Logic Although short-term catalysts are not prominent, Morgan Stanley still regards Corning as a key beneficiary in the wave of AI infrastructure upgrades. Analysts pointed out that regardless of whether future AI data centers adopt CPO, NPO, LPO, or other optical interconnect architectures, rising bandwidth demand will drive growth in optical device usage. Corning’s portfolio in FAU, PMF, external laser fiber, and GlassBridge passive photonics products has universal value across different technology routes. Management expects the large-scale commercialization of related products to begin around 2028, with the industry likely to adopt a mixed copper and fiber deployment in the early phase, rather than an immediate switch to pure optical interconnect. Morgan Stanley maintains an Equal-weight (Hold) rating on Corning, with a valuation significantly higher than the company’s ten-year historical average, reflecting the market’s expectations for a premium for AI's long-term growth. Under three scenario assumptions, analysts believe that after a roughly 40% share price pullback, the current valuation attractiveness has improved. However, for the share price to re-enter an upward channel, the key factors are the pace of optical business capacity expansion in the second half, margin recovery, and the actual implementation of AI optical interconnect demand. Risk Warning and Disclaimer The market entails risk, and investment must be prudent. This article does not constitute personal investment advice and has not taken into account the specific investment goals, financial circumstances, or needs of individual users. Users should consider whether any opinions, viewpoints, or conclusions herein are suitable for their particular situation. 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