AXT, Inc. (AXTI) experienced a significant rally on Friday, closing at $97.18, up 10.01%, as investor attention turned to the tightening supply of indium phosphide (InP) substrates used in optical chips for artificial intelligence data centers. The stock continued to climb in premarket trading Monday, with shares indicated at $110.41, reflecting continued bullish sentiment.
The surge was fueled by reports of delays in Chinese export approvals for InP, a critical compound semiconductor that enables faster data transmission via light rather than electricity. This has sparked concerns about a potential shortage, making AXT, the world's second-largest producer of InP substrates, a focal point for traders. According to analysts, InP is seen as a key bottleneck in the AI data center supply chain, alongside other components.
AXT, along with Sumitomo, controls nearly 80% of the global InP substrate market. Since China imposed export restrictions, the price of a 6-inch InP wafer has skyrocketed 250% to $5,000. This price surge has bolstered AXT's financials, with Q1 revenue rising to $26.9 million from $19.4 million a year ago, GAAP gross margin improving to 29.6%, and the net loss narrowing to $1.6 million, or $0.03 per share.
Despite the rally, analysts caution that the stock's valuation is now near or above average price targets. Investing.com shows a consensus Buy rating, but the 12-month average target is $96.50, with a range of $73 to $125. This places the premarket price of $110.41 above the average target, suggesting limited upside from current levels.
Investors should also consider the risks facing AXT. The company continues to report net losses, and a significant portion of its InP substrate manufacturing is based in China, where permit delays are causing backlogs. Additionally, dilution risk looms large, as AXT recently completed a public offering of 8.56 million shares at $64.25 per share, raising $632.5 million, with underwriters exercising options for additional shares. Shareholders have also authorized an increase in authorized common stock from 70 million to 120 million shares, making future equity sales easier.
The broader market context is one of heightened demand for AI infrastructure, with InP substrates becoming a critical component. However, the rally may have already priced in much of the optimism. Bears argue that the stock's current valuation leaves little room for error, especially if supply constraints ease or demand softens.
Looking ahead, investors will be closely watching management's upcoming comments on InP capacity, export permits, and customer demand. AXT is scheduled to present at the Northland Securities Virtual Growth Conference on June 23, with its next earnings report due on July 30. These events could provide further clarity on the company's trajectory and the sustainability of its recent gains.
