AXT InP revenue hits record $30.7M as AI optical demand tightens

AXT Inc. posted record $30.7 million in indium phosphide substrate revenue in the second quarter of 2026 as AI data-center optical demand outstrips global supply by more than three to one.

Taiwan research firm TrendForce flagged in an Aug. 6 report that InP substrate shortages have become a new bottleneck for AI-focused optical interconnects, with global demand of roughly 2 million units against supply capacity of only about 600,000.

Total Q2 revenue reached $47.6 million, up 164 percent year over year, with non-GAAP earnings per share of 19 cents. Management guided Q3 revenue to approximately $66 million, well above the $38.8 million consensus. Backlog exceeds $100 million with coverage extending into 2027 and beyond.

The supply-demand gap is structural, not cyclical. AXT and Sumitomo Electric control roughly 80 percent of the global InP substrate market, and the industry's migration toward 800G and 1.6T optical transceivers — where InP-based lasers and detectors are essential — creates a multiyear demand cycle that could reshape the optical component supply chain.

Customer prepayments lock in multiyear revenue visibility

AXT signed long-term supply agreements with Casela, Coherent, and Lumentum during the second quarter. The Lumentum deal runs through 2031 with an initial prepayment of $43.5 million and an additional $43.5 million due in 2028, totaling $87 million. The Coherent agreement covers development and supply of 6-inch InP wafers for an initial three-year term with a $22.29 million prepayment. Casela committed to purchase a fixed quantity of InP wafers during 2027 with supply priority and minimum purchase requirements.

These prepayments and capacity commitments provide tangible evidence that customers view InP as a constrained resource. Lumentum, which received a $2 billion investment from Nvidia in convertible preferred shares in March, is now effectively channeling AI capital upstream into the substrate supply chain. Management expects the InP revenue opportunity to more than triple by the end of 2026, with further expansion anticipated in 2027.

Can capacity expansion keep pace with demand?

AXT is doubling InP capacity in 2026 and plans another major expansion in 2027, while improving output through new crystal-growing furnace designs. The company's manufacturing base is in Beijing, which introduces export license risk — a factor that could constrain shipments if China tightens regulations.

Competitors are also scaling. Lumentum operates its own InP wafer fabs and produces EML and CW laser chips for 800G/1.6T networking, making it both a major customer and a vertically integrated competitor. Semtech, following its HieFo acquisition, supplies InP gain chips and CW lasers for new optical modules. Coherent plans to double its InP manufacturing capacity at its Texas facility by 2026 and again by the end of 2027. Downstream, Applied Optoelectronics and Fabrinet stand to benefit as the transition from 800G to 1.6T optical modules progresses.

AXT shares have surged 397 percent year to date, far outpacing the Zacks Computer and Technology sector's 16.4 percent gain. The stock trades at 14.67 times forward sales versus the industry average of 5.12 times, and at 48.12 times forward earnings versus the industry's 14.61 times. The Zacks Consensus Estimate for 2026 earnings stands at 86 cents per share, implying 309.76 percent year-over-year growth. The stock carries a Zacks Rank #1 (Strong Buy).

The key question is whether earnings growth can keep pace with the valuation. Q3 results, due in late October, will test whether the $66 million guidance holds. Export license approvals from China and earnings commentary from Lumentum and Coherent will also determine whether the current buying is thematic speculation or structural re-rating.

This article is for informational purposes only and does not constitute investment advice.