An analyst issued a "Sell" rating for AXT Inc. (AXTI). The analyst cited concerns that strong demand for its indium phosphide (InP) wafers, driven by AI, may not overcome significant headwinds. The report argues AXT's recent surge in gross margins to nearly 45% is unsustainable. Gross margins are likely to decline due to contractual price caps and easing supply shortages.
The analysis highlights competitive risks as the industry transitions to larger 6-inch InP wafers. Competitors are perceived to have an advantage in yield and scale in this area. The report suggests AXT lags in this transition. The analyst considers AXT's valuation stretched. The base case fair value for the stock is significantly below current trading levels.