Jason's Chips
Buy-Side AI & Semiconductor Investor
Indium phosphide substrates, AXT's business, should never become tight despite explosive demand, because Chinese capacity comes online quickly. InP demand should grow nearly 6x from 2026 to 2030, a 56% CAGR, driven by ultra-high-power CW lasers for co-packaged optics and InP photonic chips. Yet Yunnan Germanium alone should make nearly half of all InP production by 2030, so demand never fully exceeds substrate supply, which is bad for AXT. x.comÂ
AXT is a real bottleneck because it controls a third of the indium phosphide substrate needed for every laser in a data center, so it can actually choke downstream production. Its lack of revenue in 2025 reflected a market that had no revenue because it was not yet scarce. That sets it apart from Sivers, a pre-qualification photonics startup with under $10 million in revenue and no volume production, whose lasers choke off nothing. x.com x.comÂ
AXT's bottleneck thesis does not hold, because AXT is not even the number-one player in its market. Sumitomo Electric can bring new capacity online within 18 months. x.com x.comÂ
AXT looks very bearish on the risk that China stops allowing indium phosphide exports to the US. The same export question raises doubt over whether US companies will even be able to use CXMT DRAM. x.comÂ
AXT's indium phosphide substrate chokepoint gives it pricing potential, though its Coherent agreement caps annual wafer-price increases. Channel checks suggest increases of 50-60% in Q2 2026, 10% in Q3 and over 10% in Q4. With supply agreements to Lumentum and Coherent, AXT probably becomes No. 1 ahead of Sumitomo Electric. A SanDisk-style hike now looks less likely because of the annual cap, whose percentage is redacted. x.comÂ
AXT cannot be the dominant indium phosphide substrate supplier when its customers' supply depends on the Chinese government's export permitting. Lumentum has locked up InP supply for several years with Sumitomo, a larger competitor that does not face the same export restrictions. Doubling down on manufacturing in China is an odd choice given continuous permitting roadblocks. Substrate pricing is unlikely to go parabolic, despite Serenity's claims of 10x+ price increases. x.com x.comÂ
AXT's permit-backed Q4 outlook weakens the near-term operating objection to the Sell case. Q3 revenue reached $73.4M at 56% GAAP gross margin; management guides to about $90M in Q4 from business permitted or not needing permits. InP contributed $54.3M and backlog exceeds $500M, though much spans years. The remaining test is whether 2027 capacity becomes qualified, permitted shipments at durable margins. x.com x.com x.comÂ
AXT sits in the optical upstream, where surging AI compute demand meets supply that cannot be built fast enough. Amazon raised 2026 capex to $220B and said even that won't meet demand, with 2027 also short. AXT posted record revenue of $47.6M, up 164% year over year, record indium phosphide revenue of $30.7M and 45% margins targeting 50%+, and is doubling capacity in both 2026 and 2027 yet still can't keep up. x.comÂ
AXT's indium phosphide business is at China's mercy, since its expansion inside China lets Beijing decide every line item on every purchase order. Per a report shared by @wallstengine, US officials are pressing China over delayed InP export approvals as the material becomes an AI data center bottleneck, and AXT says export permits are its biggest challenge. The stock was rejected at resistance despite that news. x.com x.com x.comÂ
AXT's bull case hinges on supply rather than demand, and China holds many of the cards. Demand is growing strongly, but China can reasonably be expected to favor its own industry and permit exports only where they serve its broader interests, which argues against overly optimistic forecasts. @larmatrade notes over half of revenue is now domestic Chinese; if half of demand is Chinese, AXT should to some extent be valued like a Chinese company, and the market is likely to price it so over time. … Show more
InP substrate demand and pricing still support the AI optics supply chain. Yunnan Germanium reports higher InP volumes from AI data centers and optical communications, plus higher prices. Q3 revenue rose 134.6% year on year, near AXT's guided 136%, but also includes germanium. IQE's H1 photonics grew 45%, partly from US defense funding. AXT's $66m Q3 guide covers only licensed exports or sales needing no license; a miss would more likely reflect licensing. x.comÂ
AXT's upside looks capped because its valuation already prices in a near-flawless indium phosphide capacity ramp. Doubling its ~25k wafers a year by end-2026 and again by end-2027 gives ~100k, about 4x, likely with some multiple compression. Even with ~58% growth to 2028, 60% gross-profit growth after and a 20x EV/GP multiple, EV reaches only ~$6.9B in five years versus $6.1B now. Only surprise capacity beyond 2027 changes the math; Soitec, at 19x EV/GP, is the better play. x.com x.comÂ
