AXT Promotes AI-Led InP Growth at Conference, But Valuation and Export Risks Loom Large

What happened

AXT executives presented at the Needham Growth Conference, emphasizing surging demand for indium phosphide wafers from AI data centers and plans to double capacity. However, the DeepValue report notes the stock has skyrocketed over 1,100% in the past year to $25.72, trading at a P/B of 6.3x with negative earnings and free cash flow. This optimism contrasts sharply with the report's findings of volatile China export permits, which previously caused gross margins to turn negative and revenue to plummet. Critical risks include potential permit halts, oversupply from competitors like Sumitomo, and a stretched financial profile after a recent $100 million equity raise. Thus, while AI tailwinds are real, AXT's current price assumes flawless execution amidst significant geopolitical and operational uncertainties.

Implication

The conference highlights AXT's strategic focus on AI-driven growth, but investors must weigh this against the report's evidence of opaque permit approvals and weak financial metrics. Any lapse in export permissions could swiftly reverse recent revenue gains, as seen in early 2025 when margins plunged. Capacity expansion, funded by dilutive equity, depends on sustained high utilization and stable ASPs, which are threatened by competitor expansions and potential oversupply. With a P/B ratio far above historical norms and negative cash flow, the stock is priced for perfection, making it vulnerable to multiple compression if growth stalls. Consequently, the risk-reward profile remains unfavorable, supporting a cautious stance until a lower entry point near $15 is reached.

Thesis delta

The new article reinforces AXT's growth narrative but does not change the fundamental investment thesis. The DeepValue report's strong sell rating is upheld, as the company's promotional messaging fails to address core risks like export volatility and financial fragility. Investors should await clearer signs of sustainable margin improvement and permit stability before considering an entry.