Corning Stock Falls 40% from Peak; Morgan Stanley Sees Optical Capacity Ramp as Key to H2 Recovery

Corning (GLW-US) will release its second-quarter financial results before the US market opens on July 28. Morgan Stanley believes the company's performance is unlikely to deliver a "better-than-expected surprise," and the market's true focus will center on the speed of supply improvement in its optical business, progress on capacity ramp-up in the third quarter, and the potential for margin recovery in the second half of the year.

Morgan Stanley notes that with Corning's optical business operating near full capacity, the likelihood of second-quarter revenue significantly exceeding expectations is limited. The firm estimates revenue may beat consensus by no more than $50 million, with EPS exceeding forecasts by approximately $0.01 to $0.02.

Analysts believe the Q2 earnings report itself is not the primary driver for stock movement. Instead, management's outlook on H2 capacity expansion, pricing power, and gross margin improvement will be the core determinants of Corning's stock trajectory.

Notably, Corning's stock price has declined approximately 40% from its late-June peak. Morgan Stanley believes this correction has significantly improved valuation, but for the stock to resume an upward trend, new market catalysts are needed. Optical business supply volume expansion will be the most critical variable in the second half.

Morgan Stanley states that Corning's optical business is currently in a "supply cannot meet demand" state, with existing capacity nearly fully absorbed by the market. Therefore, the potential for second-quarter revenue to significantly exceed expectations is low. If the company aims to create greater earnings elasticity, it must rely on two main directions: further price increases and earlier release of new capacity.

Analysts point out that GlassBridge-related opportunities have already been incorporated into Corning's $10 billion photonics business framework, and the market has partially priced in this positive factor. Therefore, more important than revenue performance in this earnings report will be changes in gross margin and management's assessment of the pace of Q3 capacity expansion.

Currently, the market generally expects Corning's quarterly revenue to increase sequentially by about $200 million, of which the optical business must contribute at least $50 million in new revenue. This expectation is based on the assumption that new capacity will be released according to plan.

Additionally, the Glass Innovations business, which accounts for about 30% of Corning's core revenue, may still provide some support. As foldable device sales improve, there is potential for a slight upward revision in revenue for this segment. However, the consumer electronics market still faces pressure from rising memory prices, which could offset some growth momentum.

Compared to the optical business, the solar business remains the biggest drag on Corning's profitability.

Morgan Stanley estimates that in Corning's Q2 financial forecast, the solar business will drag EPS by approximately $0.07, equivalent to reducing core EPS from the company's guidance midpoint of $0.75 by about 9%.

Of this, about $0.03 stems from $30 million in temporary shutdown costs, and another $0.04 comes from ongoing efficiency losses during the silicon wafer capacity ramp-up phase. The total impact is approximately $61 million after tax and $75 million before tax.

Analysts expect shutdown-related costs to dissipate first, and as silicon wafer manufacturing efficiency improves, cost pressures will gradually ease in the second half.

If the solar business recovers faster than market expectations, Corning's Q3 earnings guidance could be further revised upward, becoming a significant catalyst for stock price recovery.

Regarding the display business, Corning benefited in the first half of this year from early inventory buildup by TV brands. Influenced by major events such as the Winter Olympics and the World Cup, panel manufacturers maintained second-quarter capacity utilization rates between 80% and 85%, roughly in line with Q1 and above the year-ago level of about 78%.

Morgan Stanley believes that the panel industry continues to maintain good supply discipline, helping to support glass prices and the profitability of related businesses.

However, analysts note that strong demand in the first half was partly due to early inventory buildup. As panel makers' orders return to normal in the second half, the demand boost from prior concentrated inventory accumulation may gradually fade, potentially slowing growth in the display business.

Despite limited short-term performance catalysts, Morgan Stanley remains positive on Corning's long-term role in the AI infrastructure upgrade wave.

Analysts state that regardless of whether future AI data centers ultimately adopt co-packaged optics (CPO), near-packaged optics (NPO), linear pluggable optics (LPO), or other optical interconnect architectures, the continuous increase in data transmission bandwidth demand will drive higher usage of optical components.

Corning's current positioning in passive photonics products such as FAU, PMF, external laser fiber, and GlassBridge is seen as a key advantage that can span multiple technology roadmaps.

Corning management expects large-scale commercialization of related products to begin around 2028, with the initial market more likely to adopt a hybrid deployment model combining copper cables and fiber optics, rather than a direct full transition to pure optical interconnect architectures.

Morgan Stanley currently maintains a "Equal-weight (Hold)" rating on Corning and notes that the valuation implied by this rating is clearly higher than the company's 10-year average, reflecting the market's additional premium for AI's long-term growth potential.

Under various scenario analyses, Morgan Stanley believes Corning's valuation appeal has improved after the approximately 40% stock price pullback.

However, whether Corning's stock can return to an upward trend still depends on the speed of optical business capacity release in the second half, progress in profitability recovery, and whether AI optical interconnect demand can truly translate into actual orders and revenue growth.