Key Takeaways:
AXT's record backlog above $100 million and surging indium phosphide demand position it as the higher-upside play in AI photonics.
AXT Inc. has surged 761% year to date, far outpacing Coherent's 105% gain, as the niche substrate supplier rides accelerating demand for indium phosphide wafers used in AI data center optical networks.
"We exited Q1 with a record backlog exceeding $100 million and expect Q2 to be our largest indium phosphide quarter ever," AXT Chief Executive Officer Morris Young said on the earnings call.
AXT's first-quarter revenue rose 39% year over year to $26.9 million, driven by InP wafer sales to Tier 1 laser makers and transceiver manufacturers. Gross margin improved to nearly 30% from negative levels a year earlier, and management expects to reach profitability in the current quarter. Coherent posted record quarterly revenue of $1.8 billion, up 21%, with its data center and communications segment accounting for 75% of total sales.
The divergence matters because AXT sits earlier in the AI optical supply chain — supplying the substrates that enable high-speed transceivers — and plans to double production capacity in each of the next two years. Coherent, at roughly 67 times AXT's revenue, must execute across a broader portfolio to sustain its growth trajectory.
Indium Phosphide Becomes the Bottleneck
The AI buildout is creating a supply squeeze in indium phosphide, a compound semiconductor critical for 800G and 1.6T optical transceivers that connect GPUs across hyperscale data centers. AXT, one of the few vertically integrated producers with access to raw gallium and indium, is positioned to benefit as customers scramble for reliable supply. The company now supports nearly all leading optical customers globally, including Tier 1 laser manufacturers and transceiver makers, according to its earnings presentation.
Coherent, by contrast, is a vertically integrated photonics giant that produces lasers, transceivers, and optical circuit switches directly for AI data centers. Its partnerships include a high-profile collaboration with Nvidia on co-packaged optics (CPO) solutions. But its larger scale — $1.8 billion in quarterly revenue versus AXT's $26.9 million — means growth depends on execution across multiple product categories simultaneously.
Capacity Expansion Creates Strategic Leverage
AXT expects to double InP wafer capacity in 2026 and again in 2027, management said, with few competitors possessing comparable flexibility or integrated raw material access. The company is investing in 6-inch indium phosphide wafers designed for increasingly sophisticated optical devices supporting scale-up and scale-out AI workloads. Management believes CPO could become another major growth inflection beginning in late 2027.
Coherent's 6-inch InP ramp is already contributing to margins and production capacity, and its multiyear agreements with hyperscalers extend toward the end of the decade. Orders stretch into calendar 2028, providing strong near-term visibility. Yet expectations are already elevated for a company trading at 12.87 times forward earnings, above the industry average of 15.83.
Valuation and the Investment Case
AXT trades at a forward price-to-sales multiple of 54.98, well above the industry average of 9.58, reflecting the premium investors are placing on its early-cycle growth narrative. Coherent carries a Value Score of D from Zacks, while AXT scores an F, indicating both are priced for perfection. But for investors seeking greater upside exposure to the AI optical networking cycle, AXT's accelerating backlog and capacity roadmap offer a more compelling risk-reward profile. AXT carries a Zacks Rank #2 (Buy), while Coherent holds a Zacks Rank #3 (Hold).
This article is for informational purposes only and does not constitute investment advice.
