What is an AXTI (and why is it up 80x in 12 months)
B O T T L E N E C K
AXTI is a funny company.
They are worth over seven or eight billion dollars once you account for the dilution. Currently, they’re at about 100 million in revenue run rate. Lol.
But okay okay, let’s forget about any and all numbers for a second.
What if I told you that there is one chemical compound that is needed for all of optics? That there is no way around it, and that it would scale exponentially once scale-up CPO hits, and you will need big massive lasers made out of this compound stuffed deeper and deeper inside of a rack.
And there’s one company that holds a substantial global share of this compound and has tons of brownfield capacity available and can convert capacity from another compound to this compound and can build greenfield once its brownfield capacity is saturated and is basically doubling capacity year over year.
Interested? That’s what I thought.
And that’s what the market also thinks too, as they have returned a cool 7x since the start of this year.
And their 12-month return?
So yeah, they confuse the shit out of me forever, but it is finally time to look at what they actually do. Funny enough, the fact that they have kept running while the general sentiment on X and Substack was extreme skepticism and bearishness probably means that the bull case is underrated. This company makes SNDK look like a stock you would buy after reading The Intelligent Investor by Ben Graham.
Deep coverage on blue chips refers to LITE, BE, INTC, big memory vendors, etc.
Thematic work includes:
industry/tech overviews
investment maps comparing all of the players in an industry
economic style thinking and theory for AI infra
macro
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Introduction
The agenda for today is simple. We will first talk about the fundamentals of the company and then review their most recent earnings call to see how they’re doing.
AXTI makes indium phosphide substrates, which are the raw materials needed to make data center lasers, such as EMLs (transceivers) and high-power CWs (CPO).
Which happens to be the number one bottleneck in all of AI at the moment. AXTI is the bottleneck of all bottlenecks. The bottleneck final boss.
The spot price has ripped, but I think it undersells how bad this constraint has gotten. The chart isn’t even as atrocious as memory today. Let me just say that there is a reason Lumentum is now 30% behind demand on EMLs and probably over 50%, (depending on how you interpret management’s commentary) behind demand on their scale-across laser components.
For an introduction on why indium phosphide is needed for lasers in the first place, please see my Sipho introduction. The gist of it is that there is basically only one semiconductor chemical in the world that’s able to produce light at the required wavelength for long-haul data center communications, and that is indium phosphide. Silicon can’t produce light at all. Gallium arsenide is the other choice, but it will increasingly be relegated to niche shorter-reach use cases. I will skip over a lot of the technical stuff for this article today because I want to mainly be focused on answering the question of why the hell this stock is up so much instead of why this chemical over this other chemical and how the chemicals are made.
AXTI controls roughly a third of this market and has by far the most vertically integrated supply chain out of everyone who makes indium phosphide. Their operations are primarily based in China through their subsidiary Beijing Tongmei, and they control a wide swath of raw materials companies all across the indium phosphide supply chain. They control everything including extracting the stuff, refining the stuff, and making the stuff super pure. This gives them cost and speed advantages.
They process the stuff like this:
Tongmei/JVs source and refine high-purity indium and phosphorus.
AXT combines them into InP source material.
They grow a single-crystal InP boule/ingot using proprietary VGF, or Vertical Gradient Freeze.
They dope it depending on spec, for example sulfur-doped n-type for laser substrates or iron-doped semi-insulating material for other uses.
They slice, lap, etch, polish, and inspect the wafers for diameter, resistivity, orientation, thickness, and low defect density.
And last but not least, their entire destiny is dictated by export licenses, lol.
Earnings
Now, on to the earnings review.