$AXT Comments

If you invest in AXT, please read

This is going to be a quick and informal post, but I wanted to put this out there.

I will be posting a full deep dive on Axt in the coming weeks that will provide more clarity into the company.

So this is primarily written for those that are invested/considering investing.

Let me be clear, this is NOT a recommendation to do anything.

This is not a top signal etc.

I am not telling you to sell.

I just want to provide you with information and you do what you want with it.

I recommend doing some additional digging as well.

Currently the stock is trading @ $48 which is only ~10% off all time highs from a couple days ago.

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A lot of the growth that the AXT stock has received in the last 4 months is because of their position in the supply chain for photonics.

They are one of a very small group (mostly framed as 2 main players, Sumitomo being the other) that make InP wafers that the industry relies on to grow lasers.

This is a choke point on the market.

So the idea is that if AXT is critical for the optical buildout, they have extreme leverage and will make alot of money.

But they haven’t made alot of money yet.

Last quarter they did $23 million in revenue. Today they are trading at $2.7b mkt cap.

So obviously the market is pricing in a lot of growth.

The reason they are doing so little revenue right now is that China is controlling exports of their materials and limiting how much they can ship.

The hypothesis is that once these constraints are lifted, AXT has extreme customer demand that they could sell in to and make lots of money if they can ramp their capacity.

In the AXT call, which I discussed a lot on X and will cover in my deep dive, management was very forward about how much demand they have. Long term agreements, CEOs personally flying in etc. The picture it painted is what the market is agreeing to. So much demand. And I believe it.

But there’s 2 issues.

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First off, very briefly, is the uncertainty around China. If China doesn’t ease restrictions, AXT’s revenue will still be very low relative to its mkt cap. They do sell (and this part of their business will be growing) inside China. But the market is pricing in way more growth then this will provide. So there is clearly geopolitical risk, and with everything going on in the Middle East, this is more pertinent than ever.

Nothing here is new so I won’t belabor.

But here is one bit from my notes on this and I’ll move on:

’CFO Gary Fischer stated that providing future financial guidance is tricky because the timing and success of securing permits are "not predictable nor in our control". VP of Business Development Tim Bettles added that the process is "not transparent at all" and that processing times have become highly variable, deviating from the consistent 60-day cycle they had previously observed. Bettles also noted that it is reasonable to assume geopolitics are playing a role in this unpredictability.’

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Second, which is the point of this post, is that we got more clarity from numerous companies like Lumentum, Coherent and AOI. And this is why it’s so important to stay dynamic.

These companies buy wafers from companies like AXT and Sumitomo.

Recently, I believe it was at the Morgan Stanley conference a few weeks ago, Lumentum disclosed that they locked up a 7-year supply from a ‘third-party supplier located entirely outside of China’. If this is true, then Lumentum, who is one of the world largest builder of laser chips needed for optics, completely bypassed AXT. And, presumably, locked up supply with Sumitomo.

Then we have Coherent. Coherent has explicitly bypassed this specific bottleneck, with management confirming they have "multiple six-inch indium phosphide substrate suppliers". They have already "secured committed substrate supply" that fully supports their goal of doubling their internal capacity by their December quarter. On the OFC call yesterday they said that they source substrates from over 5 suppliers. And they work on 3-5 year timelines with long term agreements in place. This does not mean that they don’t source from AXT. But it does mean they have options and feel confident that they have the wafer supply they need.

Lastly, AOI yesterday said that China is "artificially restricting certain exports" and regulating the export of InP wafers. While this creates a short-term supply chain hurdle that requires a "realignment of resources" to fix, management views it as a much more tractable problem to solve than dealing with materials that are actually rare and difficult to process. To navigate this, AOI is actively monitoring the situation and relying on its very good, long-term relationships with major InP suppliers. So again, they are hinting at the idea that they are actively seeking out sources that aren’t exposed to China.

So we know that Lumentum locked up supply outside of Axt, and Coherent and AOI discuss actively seeking out multiple sources that minimize geopolitical risk.

What happens to AXT if their permits keep getting pushed back long enough where these main laser companies build a whole playbook around avoiding China?

There is alot more to all of this, but I wanted to put this out asap.

I saw an account talking about this on X, and I wanted to get ahead of it just incase it started to gain traction.

Please just take this into consideration and do some more digging.