AXT, Inc. Positioned For Growth From Increase In AI Computing

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AXT, Inc. (AXTI) reported Q4-2023 back on February 22nd and its stock price rallied 150% on news of its 2024 outlook. The company expects higher revenues for its semiconductor wafers due to increased demand from AI computing and next-gen data infrastructure (fiber optics). The company’s stock price currently trades around its book value ($4.68/share). Future earnings over 2024 may increase the stock price as high as $6 per share, representing a 20% potential gain. I rate the stock as a buy and recommend a long-held position. The risk is moderate for such a strategy, but one should be warned that there is currently resistance at the $5 mark. The stock has seen increased momentum over the last thirty days, which may present the impetus for another breakout. The high demand for AXT’s non-silicon wafers will drive revenue in 2024.

AXT’s Product Mix

AXT describes itself as a material science company that develops and produces high-performance compound and single-element semiconductor wafer substrates. Its products are in demand where silicon wafer substrates will not work. The applications include semiconductors and optoelectronic devices. Its markets include 5G infrastructure, data center connectivity, passive optical networks, LED and Micro LED lighting, broadband, fiber optics, and health monitoring devices, including biometric devices.

AXT’s product mix consists of indium phosphide (InP) wafers, gallium arsenide (GaAs) wafer substrates, and single-element substrates made out of germanium (Ge). Its wafer substrates are manufactured in China by its subsidiary Tongmei which has ownership in ten different Chinese raw materials producers. These companies produce gallium, arsenic, germanium, pyrolytic boron, nitride, and other materials used in wafer substrate manufacture.

The wafer is the substrate upon which microelectronic devices are constructed, for instance, circuit boards. The wafer is itself a thin slice of semiconductor material(s). Besides circuit boards, microchips, and laser optics, non-silicon wafers are used for applications like solar and satellite panels. These wafers are in high demand, especially in expanding data infrastructure and AI applications.

ATX makes revenue by selling specialty material substrate wafers to businesses in the US, China, and Europe and by selling the raw materials themselves. The company has an advantage in the market for its materials. The science behind these wafers is complex and the company works closely with its customers to fit their specific needs.

Growing Demand For Non-Silicon Wafers

AXT provides specialty wafers to several growing global markets. The global market for indium phosphide (InP) wafers is expected to grow at a CAGR between 12% and 14% over the next ten years. Smart phone (5G networks), tablets, and data centers (cloud computing) contribute to the growing demand for indium phosphide wafers.

The global market for gallium arsenide (GaAs) wafers is estimated to be  $1.18 billion globally and is expected to double by 2029 at a CAGR of 12%. This market is driven by the increased use of LED’s, laser diodes, and optoelectronic devices. Smartphones and 5G networks are also adding to this demand.

Germanium (Ge) wafers represent a global market valued at $15.3 billion in 2022 and is expected to reach $25.9 billion by 2032 at a CAGR of 5.42%. This market is increasing due to the higher usage of infrared optics, solar cells, and fiber optics. AXT claims it is one of the few manufacturers of non-silicon wafers which provides its own raw materials.

Q4-2023 Results Reported February 22nd

AXT reported $20.4 million in revenues for Q4-2023, representing an 18% increase QoQ and a 24% decrease YoY. For Q3-2023, the company reported $17.4 million in revenues and for Q4-2022, the company reported $26.8 million in revenues. The company expects revenue numbers to increase over 2024. If the numbers stay the same or decrease, this may be a concern in the valuation of the company at the current stock price.

The company reported its margins at 23.2% compared to 11.3% for Q3-2023 and 32.5% for Q4-2022. The sequential growth in margins was driven, according to the company, by higher volume sales and higher product mix. AXT expects a return to the previous year’s higher margins.

AXT reported operating expenses of $7.5 million for Q4-2023, compared to $7.8 million in Q3-2023 and $9.0 million in Q4-2022. Operating loss for Q4-2023 was ($2.7) million, compared to a loss of ($5.8) million for Q3-2023 and a loss of ($0.3) million for Q4-2022.

Overall the company reported a net loss of $2.8 million or $0.07 per share compared to a net loss of $4.9 million, $0.12 per share, QoQ. The company had reported a net income of $2.0 million for Q4-2022 or $0.05 per share. Investors will want to see a return to net income on future earnings statements.

AXT is aware that its revenue numbers and overall performance are down from its 2021 reports. There is no guarantee on its part that demand will bring this previous financial performance back. I think that AXT’s performance will improve over 2024, as the company states. If the company cannot report higher revenues and net income during 2024, then one should reconsider any long-term investment in the company. Ideally, these markets continue to grow and the company is able to take advantage of it.

AXT’s Revenue Breakdown

In its earnings transcript, the company addressed its revenue breakdown and driving factors. Sales of indium phosphide increased QoQ to $5.4 million. ATX sees a stabilizing market for this substrate with increasing potential for AI applications, pound networking, and data center applications. Here is a statement from AXT on future demand of indium phosphide increasing due to AI computing:

We view AI as an emerging new application for indium phosphide that will develop in exciting ways over the coming years. Today, AI applications are primarily using gallium arsenide VCSELs, which requires a relatively small amount of substrate material.

But as the industry moves to 800 gig and then 16 terabytes speeds, we expect that there will be a necessary transition to indium phosphide. AI will drive up the need for massive data transfer requirements with increased bandwidth, low attenuation and low distortion.

This interest in indium phosphide for AI applications is intensifying the market demand for 6-inch indium phosphide. This fee signal clarity and long-distance capability of indium phosphide are optimal for AI applications.

Next generation silicon photonics devices and other items for high-speed data center transceivers also contributed to the revenue of indium phosphide in Q4 and should drive growth for Q1-2024.

Gallium arsenide revenues increased QoQ to $6 million or 43%. The company said that the gallium arsenide market looks to be improving, which includes applications for wireless and LED devices.

Germanium substrate wafer revenues decreased QoQ to $1.1 million. Revenue from its combined materials joint venture equaled $7.9 million. Sales from raw materials grew 13% and should remain strong for Q1-2024.

The company shared its Q1-2024 outlook. It expects Q1-2024 revenue between $20 million and $22 million and a net loss between $0.08 and $0.10 per share. Investors hope that the increased demand predicted for 2024 brings AXT back to reporting net income and higher margins for the remaining of 2024.

The company’s revenue growth is impressive compared to the previous quarter, but it has decreased YoY. The company’s outlook for Q1-2024 does not show significant improvement. The buy thesis for AXT becomes less tenable if the company reports the same results or worse results over 2024. One would want to see significant results for Q2-Q4-2024. The company has not hinted at such performance, but there is positive market sentiment around the demand for data-related infrastructure.

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For 2021 and 2022, AXT consistently reported higher revenue numbers, higher margins, and net income. The trend changed for 2023, revenues fell and net loss was reported. The bigger question is whether the company will return to the better performance experienced in previous years. The company has indicated that it expects such a return in 2024.

For now, the company’s stock price seems undervalued. It is trading at or around its book value. Its forward multipliers indicate that there is room for the stock price to grow. Market consensus has estimated the higher target price for AXT at $6 per share. The company’s 2024 performance will depend on the market demand for its products. AXT indicates in its Q4-2023 report that demand is increasing. It is true that the global semiconductor market is set to increase for the next ten years. Demand for updated 5G and fiber optic data infrastructure is also set to increase.

Historical Stock Price Performance

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The company’s stock price has been up 32% over the last twelve months and 101% over the last 30 days. Up until the recent rally (Feb-Mar), the stock price was bouncing between $2 and $3 per share. The company’s forecast for 2024 in its Q4-2023 report caused the price to rally 150% and stay above the $4 price.

50% of the company’s stock is owned by large institutions. It indicates positive investor sentiment and a high interest in the company’s stock. Whether the current rally will last is uncertain. Market volatility will likely keep the price bouncing. Resistance at the $5 line has been persistent through this rally. It is yet to be seen if sentiment and momentum can move the stock past the resistance. Two years ago, the stock price was capable of reaching $9 per share. At that time, revenues and valuation were higher.

Risk and Investment Strategy

AXT has all the resources present to continue its business strategy and improve its performance. The company is at a low risk of ill financial performance and its products will continue to see high market demand. An investment in AXT comes at moderate risk with the understanding that the company is small-cap. I rate the company as a buy and recommend a long-hold strategy. It is thought that the company’s financials will improve over 2024 along with its stock price.

A target of $6 per share is not unreasonable and would provide the potential for a 20% gain. I think that the company’s stock price can go as high as 5x (NTM Total EV / Revenues) before overvaluation is a concern. There is no perfect science behind the thesis. The fact that the company makes niche wafers for a high-demand industry allows for an interesting picture of growth.

If the stock price continues to climb above $5 per share and stabilizes in the $5-$6 channel, then a covered call strategy may present itself. If the stock price begins a new downtrend and falls at or below $3 per share, then one might want to exit the strategy. If financial results for 2024 look negative and represent lesser performance, then the investment should be reconsidered.


AXT presents an interesting small-cap materials strategy that takes advantage of the trending AI landscape and other next-gen technologies. The company provides specialty wafers to a niche market, thus ensuring its future revenues. The company’s performance shows the high demand for non-silicon substrate wafers. For now, I rate the company as a buy and suggest a long-term strategy.

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Disclosure: I hold a long-position in ATXI.

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