Bull of the Day: AXT (AXTI)

AXT (AXTI) is $4.25 billion material science company that develops and manufactures high-performance compound and single element semiconductor wafer substrates comprising indium phosphide (InP), gallium arsenide (GaAs) and germanium (Ge). 

AXT designs, develops, manufactures and distributes high-performance compound semiconductor substrates, as well as opto-electronic semiconductor devices such as high-brightness light emitting devices, and vertical cavity surface emitting lasers.

AXT recently delivered record Q2 revenue of $47.6 million, up roughly 165% year over year, returning to profitability with gross margin expanding to nearly 45%, highlighted by a stunning 170% EPS beat. 

Analysts had to "jump-and-raise" both top and bottom line estimates based on the July 30 report. If you were paying attention then, the market was in the middle of the "Leopold Leverage Liquidation" as his Situational Awareness hedge fund was imploding and took lots of quality stocks down too far.

In my TAZR Trader portfolio, we bought over 10 positions the week of July 27 during that irrational, emotional tumult. I only wish that AXTI at $40 was one of them!

Why AXTI is One of the Best Zacks #1 Rank Stocks

Growing revenues to over $215M at 145% this year, and next year to $450M at 100%+, the stock still trades a little rich at 10X forward sales. 

But profits are also projected to continue ramping triple-digits since their late-July Q2 "beat-and-raise" stunner where analysts subsequently vaulted EPS estimates for this year and next -- which is why AXTI became a Zacks #1 Rank based on these moves...

2026 consensus EPS went vertical over 200% from 27-cents to 86-cents... representing over 300% annual growth!

2027 consensus EPS also vaulted over 200% from 71-cents to $2.20!

I guess Wall Street spreadsheet jockeys finally got it. And I did too because I just told my investor group in TAZR last week to look for a test of the $55-60 zone and BUY it.

For context, after earnings AXTI shares had rallied strongly to $96 in mid-August and then, as relatively unknown high-beta midcaps do, it fell back to its 200-day MA at $55.

And we got our second chance to buy that blind pessimism with a pre-Fed dip under $60 this week.

So let me share some insights on why I think AXT is uniquely positioned in a key semiconductor substrate market known as indium phosphide (Inp).

The AXT Competitive Bottleneck

AXT is the lone US supplier of InP... but it does depend on China for supply of this substrate as its manufacturing is overwhelmingly in China. AXT itself says there are only three high-quality InP substrate providers globally, so its strategic position is better described as a scarce U.S.-based supplier with Chinese manufacturing rather than a domestically manufactured U.S. monopoly.

Here's how AXT describes their unique US-China competitive position...

"The company’s wafer substrates are used when a typical silicon wafer substrate cannot meet the performance requirements of a semiconductor or optoelectronic device. AXT’s worldwide headquarters are in Fremont, California and includes sales, administration and customer service functions. AXT’s subsidiary in China (“Tongmei”) has similar functions as well as manufacturing facilities to produce wafer substrates. In addition, as part of the supply chain strategy, AXT, Tongmei and Tongmei subsidiaries collectively have partial ownership in ten companies in China producing raw materials."
 

AXTI shares popped 11% Wednesday off the $55 level after Needham named it one of five semiconductor beneficiaries of the co-packaged optics ramp, following a five-day visit to SEMICON Taiwan 2026. Two of their top picks were Lumentum (LITE) and Coherent (COHR). 

The Needham analysts, reiterating their $90 PT, described CPO (co-packaged optics) as the single most important technology transition for solving AI's networking bottleneck through 2028 and beyond, with AXT's indium phosphide substrate business at the center of it.

If you are ready for a deeper dive into the AXT and the semi-substrate industry of InP and beyond, continue reading because I had a dialog with my some of my favorite AI models and put together this summation...

AXT Key Position in Semiconductor Substrates

AXT is an interesting Semi/AI infrastructure play because it supplies compound-semiconductor substrates that sit underneath some of the fastest-growing optical communications technologies. The bull case is increasingly centered on indium phosphide (InP), where AI data-center buildouts are creating a potentially multiyear demand cycle.

1. InP could be the transformational opportunity

AXT's InP substrates are used to manufacture lasers and photonic components for high-speed optical communications. As AI clusters become larger and GPU counts increase, moving data between processors and servers becomes an increasingly important bottleneck. Optical links offer advantages in bandwidth, distance and power consumption versus electrical interconnects.

AXT's Q2 2026 results provide unusually strong evidence that this thesis is already materializing: InP revenue reached a record $30.7 million, up dramatically from $13.6 million in Q1, with management saying the majority was related to data-center applications. Total company revenue reached a record $47.6 million, up 164% year over year.

The opportunity could extend beyond today's 800G/1.6T optical transceivers into co-packaged optics (CPO) and other architectures that put photonics increasingly close to the compute package. Management views this as another potentially significant demand inflection beginning in the 2027+ timeframe.

2. AXT appears to have a capacity advantage

Perhaps the most important part of the bull thesis is that AXT isn't merely participating in a growing market—it is rapidly adding capacity in a market with relatively high barriers to entry.

Management expects InP capacity to reach approximately $35 million per quarter by the end of 2026, versus roughly $17 million of quarterly revenue previously achieved. It is then planning another major expansion that could take capacity to approximately $65–70 million per quarter in 2027/early 2028.

Management says customer demand is currently exceeding available supply and that backlog has risen to more than $100 million. Long-term supply arrangements with major industry participants -- including Coherent and Lumentum -- provide additional evidence that customers are willing to commit to future supply.

3. The financial leverage could be substantial

AXT historically operated at relatively low volumes and poor margins. That makes the recent improvement particularly interesting.

Q2 2026:

Revenue: $47.6M
GAAP gross margin: 44.9%
GAAP net income: approximately $11.1M
InP revenue: $30.7M

The combination of higher factory utilization, better product mix, larger wafers and improved manufacturing productivity could produce significant operating leverage if demand continues.

The move from a low-volume substrate manufacturer toward a capacity-constrained supplier could therefore change the company's economics substantially.

4. Larger wafers could increase both capacity and margins

AXT is progressing toward 6-inch InP substrates, while customers are already migrating from 3-inch toward 4-inch wafers. Larger wafers allow more devices to be produced per substrate and can improve manufacturing economics. Management also characterizes 6-inch InP as substantially more difficult to manufacture at volume, potentially increasing the technological barrier to entry.

If AXT successfully commercializes 6-inch production, it could gain both volume and pricing/mix benefits.

5. GaAs provides a second growth vector

The bull thesis isn't exclusively InP.

AXT also produces gallium arsenide (GaAs) substrates used in:

data-center lasers
industrial robotics
RF/wireless applications
VCSELs and other optical applications

GaAs revenue was $6.6 million in Q2 2026, and management reported sequential growth in industrial robotics and data-center laser applications while seeing additional opportunity in semi-insulating wafers for wireless RF.

This gives AXT another way to benefit from increasing semiconductor content in robotics, communications and optical systems.

6. Its vertically integrated materials strategy is strategically valuable

AXT's Chinese joint ventures supply critical raw materials used in its substrate manufacturing. The company recently began refining high-purity indium, giving it greater control over a particularly important input for InP production. Its raw-material businesses generated approximately $10 million of Q2 revenue, a record level.

That vertical integration could become increasingly valuable if InP demand grows faster than the underlying supply chain.

The bull thesis in one sentence...

AXTI is potentially transitioning from a small, cyclical compound-semiconductor substrate company into a critical supplier to the AI optical-interconnect infrastructure buildout, with InP demand, constrained industry capacity, rapid factory expansion, larger wafers, improving margins and additional GaAs/robotics/RF opportunities creating the possibility of several years of unusually high growth.

What could make the thesis wrong...

The major risks are equally important: AI optical spending could slow; hyperscalers could adopt competing photonic technologies; silicon photonics and VCSEL architectures could take more share; China export controls could restrict AXT's ability to serve customers; the aggressive capacity expansion could overshoot demand; and the extraordinary recent margin improvement could prove difficult to sustain. AXT also has substantial China exposure, making geopolitics and export licensing particularly important variables.

The key metric to watch: whether AXT can turn the current >$100M backlog + rapidly expanding InP capacity into sustained revenue growth while maintaining gross margins around the recently achieved levels. If it can, the company's earnings power could be considerably larger than its historical financial statements suggest.

As I told my TAZR group on Thursday with a new buy near $67, lets be bullish on this key player and look to add under $60 -- if we should be so lucky again.

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This article originally published on Zacks Investment Research (zacks.com).

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