How has AXT’s growth changed?

  • In the third quarter of 2026, AXT reported revenue of 73.4 million dollars, up 162.6% year on year. InP substrate revenue was 54.3 million dollars, up 314% year on year and 76.9% quarter on quarter, making it the main source of growth.
  • Third-quarter gross margin rose to 56%, up 33.7 percentage points year on year. Revenue growth spread fixed costs over a larger sales base, while an improved product mix also lifted gross margin.
  • Nomura expects InP substrates to account for 70% of company revenue in 2026, up from 32% in 2025. It forecasts a 134% compound annual growth rate for the business’s revenue over 2026–2028, driven primarily by capacity expansion and higher average selling prices.

Why will optical communications upgrades increase substrate demand?

  • InP substrates are an upstream material used to manufacture optical chips. Nomura expects shipments of 800G and 1.6T optical modules to rise from 55 million and 25.1 million units, respectively, in 2026 to 112 million and 104.5 million units in 2028.
  • Over the longer term, near-packaged optics and co-packaged optics require higher-power lasers. Nomura estimates that the chip area of the high-power continuous-wave lasers needed for co-packaged optics can be 3–5 times that of a 70mW continuous-wave or 100G EML laser, consuming more InP substrate. Higher power, however, also imposes stricter requirements on material defects and processing uniformity.
  • Even after accounting for capacity expansion, Nomura expects the supply shortfall for optical chips used in applications such as 800G and higher-speed optical modules to narrow from 17% in 2026 to 7% in 2028. Reasons include supplier capacity expansion and improvements in production efficiency and yields for larger substrates.

How does AXT turn industry demand into orders?

  • The VGF crystal growth technology used by AXT helps control defects and uniformity, and the company can produce 6-inch InP substrates. Nomura believes the challenges of crystal growth and yield control for larger substrates favor established leading suppliers.
  • Customers have reserved capacity through agreements: Coherent prepaid approximately 22.3 million dollars under an agreement for 6-inch InP capacity at the Beijing plant; the Lumentum agreement involves up to 87 million dollars and runs through the end of 2031. Management said on the third-quarter earnings call that the order backlog had exceeded 500 million dollars, up from 100 million dollars in April 2026.
  • Competition is also increasing. Nomura expects Chinese new entrants’ share of global effective capacity to rise from 24% in 2026 to 31% in 2028. Beijing Tongmei must also apply for a permit for each InP substrate export shipment, affecting overseas deliveries.

What financial constraints lie behind the high-growth forecast?

  • Nomura expects AXT’s revenue to rise from 222 million dollars in 2026 to 932 million dollars in 2028, and net income attributable to the parent to increase from 40 million dollars to 322 million dollars. Capacity expansion, a higher share of higher-margin InP products and economies of scale support the forecast.
  • However, Nomura is more conservative than the market on pricing and margin expansion: its net income forecasts for 2026 and 2027 are 30% and 25% below Bloomberg consensus, respectively.
  • Capacity expansion also ties up cash. Nomura expects free cash flow to be negative 27 million dollars and negative 10 million dollars in 2026 and 2027, respectively, before turning positive at 101 million dollars in 2028. Increased competition could depress selling prices and margins; export permits and progress on the subsidiary’s listing are also among the risks it identifies.
  • Nomura initiated coverage of AXT with a Buy rating and a price target of 90 dollars. The target is based on a discounted cash flow model and corresponds to 44.6 times its forecast earnings for 2027.