The AXT story

What drives the business

• AXT produces specialty wafers rather than chips, using indium phosphide, gallium arsenide and germanium where silicon cannot meet performance requirements, with substrates contributing 67% of revenue and raw materials 33% in 2025.
• Its July 2026 agreement with Lumentum Operations reserves capacity for minimum annual indium phosphide commitments through December 2031, with deposits applied as shipment credits.
• In June 2026, AXT entered a Master Development and Supply Agreement with Coherent, while its Tongmei subsidiary entered a supply agreement with Nanjing Casela Technologies covering production capacity and raw material allocation.
• All substrate and raw material manufacturing takes place in China, where ownership interests in raw material companies support AXT's integrated supply chain and access to key inputs.
• Demand for data center optical connectivity, added manufacturing capacity and productivity improvements drove revenue to $47.6 million in the quarter to June 2026, compared with $26.9 million in the quarter to March 2026 and $18.0 million in the quarter to June 2025.

What the price assumes

At $84.06, the reverse DCF implies operating earnings, standing in for free cash flow, growing 82.8% a year for ten years using a 10.3% discount rate.

The historical comparison uses revenue as a substitute, which grew 0.7% a year over the last 10 years, while the TenQ check sets a 2.3% bar by moving that record halfway toward 4%.

Revenue growth of 45.8% over the last twelve months marks a sharp acceleration, but negative free cash flow means the model describes an operating earnings requirement rather than demonstrated cash growth.

Value AXTI on your own assumptions

What could change the story

• All of Tongmei's wafer substrate product families require Chinese export permits, and uncertain approval timing can prevent strong demand from becoming shipments.
• Capacity expansion also depends on meeting customer qualification and volume requirements, with failures potentially disrupting production and customer relationships.
• The 3.1% operating margin and -$20 million of free cash flow over the last twelve months leave cash conversion behind the improvement in quarterly gross margin.
• AXT announced equity offerings to support expansion, while the TenQ checks flag a rising share count and a failure to grow per share.
• Cash and short-term investments of $417 million exceed total debt of $100 million, but Tongmei investors retain conditional redemption rights of approximately $49 million if its planned listing fails specified approvals or is canceled.

What to watch next

• Management's July 2026 outlook centers on investment in capacity, technology and the integrated supply chain, without numerical revenue or margin guidance.
• The next releases will show whether revenue and GAAP gross margin sustain the improvement from $47.6 million and 44.9 percent in the quarter to June 2026, and whether free cash flow follows earnings.
• Export permit approvals, customer qualifications and receipt of Lumentum's initial capacity deposit will help show how the new agreements translate into production, shipments and funding.

Sources

• AXT's earnings release, filed with the SEC
• Its latest 10-Q or 10-K, for the risk factors
• The AXTI stock report, for every figure and check