AXT's Vertiginous Descent Masks a Deeper Divide Between Fundamentals and Momentum

AXT shares drop 12% to EUR 50.76 amid sell ratings and profit-taking, despite record InP backlog and Lumentum deal.

There are moments when a stock's price action and its underlying business narrative appear to be speaking entirely different languages. AXT is living through one of those moments right now. The company sits at the center of what is being described as the most severe indium phosphide shortage the semiconductor industry has ever witnessed, with wafer prices expected to climb more than 10 percent in the fourth quarter. Yet the shares are bleeding value at a pace that would rattle even the most battle-hardened momentum trader.

Friday brought a 12 percent decline, landing the stock at EUR 50.76. That leaves the equity roughly 61 percent below its 52-week high of EUR 128.55, a peak reached as recently as May. The damage was not confined to AXT alone—Lumentum, Coherent, and Applied Optoelectronics all felt the heat, pointing to a sector-wide profit-taking wave rippling through the indium phosphide and optical networking supply chain.

A Sell Call Lands While the Order Book Tells Another Story

The catalyst for Friday's slide came from two directions. First Principles Partners initiated coverage with a "Sell" rating and a fair value of USD 45.00, citing unsustainable gross margins and competitive disadvantages as the industry pivots toward 6-inch indium phosphide wafers. Media reports simultaneously flagged a fresh downgrade to "Sell," with analysts pointing to the recently elevated gross margin of 44.9 percent—a figure they suspect could prove fleeting given contractual price ceilings and easing material scarcity.

Those bearish voices stand in stark contrast to the operational picture AXT has painted. The company's 10-Q filing for the second quarter, which ended in late June, confirmed a record backlog for InP substrates exceeding USD 100 million. For the third quarter of 2026, management has guided to revenue of roughly USD 66 million and non-GAAP earnings per share between USD 0.30 and USD 0.32.

Underpinning that demand is a long-term supply agreement with Lumentum running through December 2031, which includes an initial capacity reservation of USD 43.5 million from Lumentum. Add to that the reported global scarcity of indium phosphide substrates and epitaxial wafers, and the setup for continued pricing power appears intact.

The Two-Sided Nature of a Supply Squeeze

The tension at the heart of AXT's current predicament is whether the indium phosphide shortage is a blessing or a curse. On August 17, the stock jumped 18 percent after a report from Taipei highlighted the supply crunch—higher wafer prices should, in theory, be a tailwind for a substrate maker. But a structural shortage is also a symptom of supply chain stress, and stress undermines predictability. When Wedbush reportedly flagged potential delays out of China as a headwind, the concern was clear: AXT's value chain runs through a globally fragmented, politically sensitive network where indium phosphide has become the bottleneck.

That ambiguity explains why institutional money and short-term traders are behaving so differently. BlackRock has expanded its position and now holds 7.75 percent of AXT—a signal that at least some large capital pools believe in the long-term indium phosphide and gallium arsenide story. GSA Capital Partners also established a new stake. Meanwhile, director Leonard J. LeBlanc sold a portion of his shares in mid-August—a move that says little in isolation but suggests not every insider views current levels as a bargain.

Leveraged Products Add Fuel to the Fire

Part of the recent price action has little to do with the underlying business. Before leveraged Tradr ETFs on AXTI launched on August 18, investors were already positioning ahead of the debut—a familiar pattern with volatile single-stock bets. Such products amplify swings in both directions because they require daily rebalancing. For a stock that already carries an annualized volatility of 188 percent, that is gasoline on an open flame.

The analyst landscape remains fractured and offers limited clarity. Zacks Research upgraded AXT to "Strong Buy" in early August, while Weiss Ratings maintained a sell recommendation around the same time, albeit with a slightly improved grade. Automated ratings of this kind say little about fundamental substance.

A Stock Caught Between Momentum and Meaning

For anyone who bought at the start of the year, the pain is relative—the shares are still up 298 percent year-to-date. But the past seven trading sessions have delivered a 16 percent decline, a pace that stands out even for a name with this volatility profile. The stock now trades about 9.6 percent below its 50-day average of EUR 56.13, a technical signal that short-term momentum has stalled after a powerful rally.

AXT, for its part, remains active on the investor relations front. The company recently presented at the 7th annual Needham Virtual Semiconductor & SemiCap 1x1 Conference, highlighting AI data center demand for InP substrates, and has announced participation in additional financial conferences in the third quarter of 2026. Upcoming appearances at B. Riley in early September and Morgan Stanley in Asia later that month could provide fresh fundamental data points.

Whether the First Principles Partners sell rating marks the beginning of a sustained revaluation or simply represents a contrarian counterweight to the optimistic operational data will likely become clearer in the coming weeks. The question of how durable those 44.9 percent margins truly are—and whether the indium phosphide shortage ultimately proves to be AXT's greatest tailwind or its most unpredictable risk—remains the central tension for investors watching this stock swing between two very different stories.