AXT (AXTI): Record Quarter, 45% Margin — and a Price That Already Knows

AXT, Inc. (AXTI) Q2 2026 — AXT reported Q2 2026 after the close on July 30. Revenue was $47.6M, +164% y/y and +77% sequentially — the highest quarterly revenue in company history, against roughly $34M expected. GAAP gross margin was 44.9% and non-GAAP 45.0%, versus 29.9% in Q1 2026 and just 8.2% in Q2 2025. Indium phosphide revenue hit a record $30.7M on AI data-centre optical connectivity demand. GAAP net income attributable to AXT was $11.1M ($0.17 diluted); non-GAAP was $11.9M, or $0.19 a share, against about $0.07 expected. The stock closed at $46.94, already +27.0% on the day ahead of the print, and traded near $57 after hours. The operating quarter was outstanding and we say so plainly. But three things sit between that headline and a shareholder. First, $4.7M of the $15.1M of pre-tax income — 31% — is interest income earned on the cash AXT raised in April, not the substrate business; strip it out and operating income was $10.4M. Second, $1.9M of the $13.0M consolidated net income (14.6%) belongs to minority partners inside Tongmei and the raw-material JVs, so only $11.1M reaches an AXT holder. Third, diluted shares went from 43.7M to 63.5M in a year, +45%, so while revenue grew 164%, revenue per share grew about 82%. And the widely-reported '$66M Q3 guidance' is not guidance at all: it is the revenue that already has a Chinese export permit or does not need one. THE CALL: HOLD (3/5, THE QUARTER WAS REAL. THE AFTER-HOURS PRICE ISN'T) — base-case value ~$51.0 vs ~$46.94 today. KEY METRICS: - Revenue $47.6M, +164% y/y and +77% q/q — the highest quarterly revenue in AXT's history; consensus was ~$34M - Non-GAAP gross margin 45.0% (GAAP 44.9%), versus 29.9% in Q1 2026 and 8.2% in Q2 2025 — a ~3,700bp swing in four quarters - Product mix: indium phosphide $30.7M (a record, 65% of revenue), consolidated raw-material JVs $10.0M, gallium arsenide $6.6M, germanium $0.272M - GAAP operating income $10.4M (21.9% margin) vs a $6.7M loss a year ago; non-GAAP operating income $11.2M - Interest income of $4.7M was 31% of the $15.1M pre-tax income — earned on the April raise, not on substrates - Minority interests took $1.9M (14.6%) of the $13.0M consolidated net income; $11.1M was attributable to AXT - Diluted EPS $0.17 GAAP / $0.19 non-GAAP vs ~$0.07 expected; diluted shares 63.5M vs 43.7M a year ago (+45%) - Cash and investments $748.8M (from $123M at March 31) after a ~$632M secondary that closed April 22; ~$665M net of $84.2M short-term loans, about $10.00/share - Q3 2026: no revenue guide issued — $66M is the revenue that already has an export permit or needs none; non-GAAP EPS guided $0.30–$0.32 on ~66.5M shares - Tongmei withdrew its Shanghai STAR Market IPO application on June 26 and is pivoting to Hong Kong (~1 year), which triggers a redemption right on $49M of 2021 private-equity money - Inventory $96.3M (+$6.2M q/q); backlog above $100M but deliberately capped to planned capacity; top 5 customers ~30% of revenue, none above 10%; China above 50% of Q2 revenue - Capacity plan: indium phosphide revenue capacity ~$60M/quarter exiting 2026 and ~$130M/quarter exiting 2027; capex ~$14M in 2026 and ~$100M in 2027; Q2 D&A only $2.5M What to watch: What would turn us bullish: an actual Q3 or Q4 revenue guide instead of a permit-secured floor, which would mean the China export-licence process has become predictable enough to forecast and removes the single largest discount in our model. A Hong Kong listing that completes without the $49M of Tongmei private-equity money being redeemed would do the same. What breaks the thesis: gross margin rolling over as new industry supply arrives, because 45% is a scarcity margin and AXT is about to triple the world's indium phosphide capacity; a quarter where the permit-secured floor comes in below the prior quarter's actual revenue; and any further equity issuance, since dilution has already cost holders more here than any operational miss. Also on YouTube: @ChargedAlpha DISCLAIMER: For informational and educational purposes only. Not financial advice. Do your own research before any investment decision.