AXT, Inc. Q2: Downgrading On Limited Visibility And Early Cracks In The AI Story (AXTI)

Just_Super/iStock via Getty Images Note: I have covered AXT, Inc. or “AXT” (NASDAQ:AXTI) previously, so investors should view this as an update to my earlier articles on the company. Last week, semiconductor substrate provider AXT, Inc. reported better-than-expected Q2/2024 results, with both revenues and profitability coming in ahead of consensus estimates: Company Press Releases While the press release did not include a cash flow statement, based on sequential changes in the company’s key balance sheet metrics, I would estimate Q2 free cash flow at approximately break-even. Strong growth in gallium arsenide and germanium substrate revenues were partially offset by a sequential decrease in indium phosphide revenues. Following a dip in Q1, contributions from the company’s consolidated raw materials joint ventures in China increased materially: Conference Call Transcripts However, Q3 guidance came in below consensus expectations due to an anticipated sequential decline in substrate revenues. Conference Call Transcript / Yahoo Finance With management having touted the company’s AI opportunity in recent quarters, a projected decline in gallium arsenide and indium phosphide sales certainly doesn’t look great but with the quarterly run rate of AI-related indium phosphide sales still below $1 million, it could take some time for sampling activity to turn into more meaningful order volumes. On the conference call, management remained optimistic on the company’s prospects despite some anticipated lumpiness in order patterns: In closing, we are optimistic about the growth and expansion of our business over the coming quarters. Across our portfolio products, the style of recovery are tangible, and though we expect some lumpiness quarter-to-quarter we have positioned ourselves well for success in this highly dynamic technology landscape. Looking ahead, new catalysts such as AI are providing strong incremental opportunity that is likely to accelerate as we move into 2025. This can significantly benefit our indium phosphide business. Further, we remain highly focused on accelerating our return to profitability and looking forward to reporting to you our progress. The company also provided an update on its efforts to list its subsidiary Beijing Tongmei Xtal Technology Co., Ltd. or “Tongmei” on the Shanghai STAR Market: We continue to make positive progress and have been in active discussions with the Shanghai Stock Exchange. Recent developments have been encouraging. We have kept our application current while many other Shanghai Stock Exchange applicants in the queue have been dismissed for business, financial, or other shortcomings. We expect to continue to work through this process during the summer and hope to have more news in the fall. However, with the Shanghai STAR Market not exactly in great shape, even near-term approval wouldn’t be a guarantee for a successful IPO. Investing.com For my part, I do not expect Tongmei to list on the Shanghai STAR Market anytime soon. Bottom Line While AXT reported decent second quarter results, guidance for Q3 was below consensus expectations, partially due to an anticipated lack of follow-on orders from the company’s AI end customer. After the alleged AI opportunity created plenty of excitement among market participants earlier this year, management’s more muted commentary in combination with signs of “AI fatigue” in the market resulted in AXT’s shares cratering by almost 20% on Friday. With the company valued at just 1.3x EV/Sales and analysts projecting a return to profitability next year, AXT looks attractive but some early cracks in the AI story and an apparent lack of near-term visibility will likely keep the stock in the penalty box for at least the next couple of months. Given this issue, I am downgrading the company’s stock from “Buy” to “Hold”.

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