Key Takeaways
- Heavy reliance on China and regulatory hurdles create major vulnerabilities, restricting market access and amplifying risks to revenue and profitability.
- Competitive threats from alternative technologies and commoditization may erode product relevance, requiring costly innovation that might not yield sustainable returns.
- Leadership in advanced substrate materials and manufacturing efficiency positions AXT for sustained revenue growth, margin expansion, and improved profitability amid rising global demand.
Catalysts
About AXT- Designs, develops, manufactures, and distributes compound and single element semiconductor substrates.
- Persistent and unpredictable export permit delays and government-imposed trade restrictions in China are likely to restrict AXT's access to key international markets for both gallium arsenide and indium phosphide substrates, severely limiting revenue growth over the long term regardless of global demand trends in cloud infrastructure or 5G.
- Intensifying global regulation and rising costs associated with environmental, social, and governance compliance-especially with new environmental restrictions in China-will increase operational expenses and could further erode already thin gross and net margins.
- The company's fundamental reliance on a concentrated customer base in China makes it acutely vulnerable to demand slumps or customer attrition, amplifying volatility in top-line results and exposing AXT to pronounced risks of revenue contraction if major clients reduce or halt orders.
- The growing adoption of alternative technologies, such as silicon carbide and gallium nitride, threatens to diminish the relevance of AXT's current product mix (especially as sector demand moves toward newer substrates for high-speed and power applications), forcing costly R&D investments that may not translate into future earnings growth or margin stability.
- Commoditization in the compound semiconductor substrate industry, particularly for indium phosphide and gallium arsenide, is likely to place sustained downward pressure on prices and market share as larger, diversified competitors and ongoing supply chain localization initiatives benefit rivals with broader product portfolios, suppressing AXT's long-term revenue and gross profit potential.
AXT Future Earnings and Revenue Growth
Assumptions
How have these above catalysts been quantified?- This narrative explores a more pessimistic perspective on AXT compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
- The bearish analysts are assuming AXT's revenue will grow by 11.2% annually over the next 3 years.
- The bearish analysts are not forecasting that AXT will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate AXT's profit margin will increase from -27.9% to the average US Semiconductor industry of 14.1% in 3 years.
- If AXT's profit margin were to converge on the industry average, you could expect earnings to reach $16.7 million (and earnings per share of $0.36) by about September 2028, up from $-24.0 million today. The analysts are largely in agreement about this estimate.
- In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 9.7x on those 2028 earnings, up from -5.7x today. This future PE is lower than the current PE for the US Semiconductor industry at 29.7x.
- Analysts expect the number of shares outstanding to grow by 1.65% per year for the next 3 years.
- To value all of this in today's terms, we will use a discount rate of 11.93%, as per the Simply Wall St company report.
AXT Future Earnings Per Share Growth
Risks
What could happen that would invalidate this narrative?- Accelerating demand for indium phosphide substrates in AI-driven data centers and high-speed optical interconnects, combined with AXT's leadership position with approximately forty percent global market share, could drive significant multi-year revenue growth as global and Chinese hyperscale spending increases.
- Improvement in the pace of export permit approvals for both gallium arsenide and indium phosphide suggests supply chain bottlenecks could soon ease, enabling AXT to realize its $10 million-plus sales backlog and boosting near-term and long-term recognized revenue.
- Continued technology leadership in high-quality, low-EPD materials positions AXT as a supplier of choice for next-generation, higher-performance photonic and wireless applications, supporting premium pricing and potential gross margin expansion over time.
- Strategic focus on driving manufacturing process efficiency and yield improvements has already resulted in recovering gross margins sequentially, with management expecting this positive trend to continue, suggesting a path to reversing operating losses and potentially returning to profitability.
- Strong long-term secular drivers such as proliferation of 5G, increased electrification, and the miniaturization of semiconductor devices are expected to expand AXT's total addressable market, supporting sustained growth in revenue and earnings as these trends accelerate globally.
Valuation
How have all the factors above been brought together to estimate a fair value?- The assumed bearish price target for AXT is $2.5, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of AXT's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
- However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $5.0, and the most bearish reporting a price target of just $2.5.
- In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $118.2 million, earnings will come to $16.7 million, and it would be trading on a PE ratio of 9.7x, assuming you use a discount rate of 11.9%.
- Given the current share price of $3.08, the bearish analyst price target of $2.5 is 23.2% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
- We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.
How well do narratives help inform your perspective?
Disclaimer
AnalystLowTarget is a tool utilizing a Large Language Model (LLM) that ingests data on consensus price targets, forecasted revenue and earnings figures, as well as the transcripts of earnings calls to produce qualitative analysis. The narratives produced by AnalystLowTarget are general in nature and are based solely on analyst data and publicly-available material published by the respective companies. These scenarios are not indicative of the company's future performance and are exploratory in nature. Simply Wall St has no position in the company(s) mentioned. Simply Wall St may provide the securities issuer or related entities with website advertising services for a fee, on an arm's length basis. These relationships have no impact on the way we conduct our business, the content we host, or how our content is served to users. The price targets and estimates used are consensus data, and do not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that AnalystLowTarget's analysis may not factor in the latest price-sensitive company announcements or qualitative material.