AXT Eyes Co-Packaged Optics as Next Growth Driver, But Execution Hurdles Persist

What happened

AXT is expanding indium phosphide capacity and advancing 6-inch wafers to target the co-packaged optics market, which is expected to emerge from late 2027. The company's long-term prospects are boosted by this AI-optics opportunity, but near-term revenue conversion remains dependent on China export permits and the ramp of existing contracts like the Coherent supply agreement. The stock at ~$50 already discounts substantial future growth, yet Q1 2026 revenue was only $26.9 million and the company still posted a net loss. Inventory has risen to $90.2 million, and accounts receivable are growing, indicating working capital is being consumed before shipments accelerate. Until sequential substrate revenue growth and permit progress are evident, the CPO narrative is a tailwind that does not justify the current valuation.

Implication

AXT's pivot toward co-packaged optics adds a viable long-term demand driver, but it does not change the immediate challenge of converting existing backlog into revenue. The stock's current price of ~$50 already prices in successful execution, leaving little room for error on export permits or the Coherent ramp. Investors should focus on Q2 and Q3 2026 results to see if substrate revenue grows sequentially from the $19.3 million base and if inventory stabilizes or declines. The CPO timeline (late 2027) is too distant to support current valuations unless near-term milestones are met. The base-case scenario from the DeepValue report implies a fair value of $48, suggesting limited upside from here, with attractive entry only below $38.

Thesis delta

The CPO opportunity extends the investment horizon but does not alter the near-term thesis that AXT must demonstrate shipment growth and permit progress. The core wait-and-see stance remains intact, as the stock already reflects a favorable long-term outcome. The delta is that the CPO narrative adds a potential growth catalyst for late 2027, but it also increases the risk of overpaying for future earnings that are far from realized.