AXT, Inc. AXTI appears to be approaching a meaningful financial inflection point as improving product mix, manufacturing leverage and pricing discipline drive a notable recovery in profitability. In the first quarter of 2026, AXTI’s adjusted gross margin climbed sharply to 29.9% from 21.5% in the fourth quarter of 2025, marking one of the company’s strongest margin improvements in recent years.
Management attributed the expansion primarily to stronger volumes and a richer mix of higher-margin indium phosphide (InP) products, which represented slightly more than half of quarterly revenues and continued to benefit from accelerating AI-related optical demand.
The mix shift toward indium phosphide is becoming increasingly important to AXTI’s earnings quality. Indium phosphide revenues reached $13.6 million in the first quarter, driven mainly by data center optical applications tied to hyperscaler AI infrastructure spending.
With backlog surpassing $100 million, management expects indium phosphide to drive sequential growth in the second quarter and deliver the largest indium phosphide sales ever in any quarter in AXTI’s history. Higher-value products, including larger-diameter 4-inch and emerging 6-inch wafers, are also likely to support stronger pricing and profitability over time.
Beyond product mix, AXTI is actively pursuing pricing actions and manufacturing efficiencies to sustain margin gains. Management disclosed ongoing price increases, particularly to offset rising indium raw material costs, while also moving toward globally standardized pricing. At the same time, higher factory utilization and improved fixed-cost absorption are supporting profitability as production scales. AXTI’s vertically integrated supply chain — including its internal raw material capabilities — is also beginning to contribute more meaningfully to margins.
Encouragingly, management now expects profitability in the second quarter of 2026 on both a reported and an adjusted basis. The company expects adjusted earnings per share of 6-8 cents for 2026.
While export permit timing remains a key swing factor, AXTI’s combination of favorable mix, pricing discipline and manufacturing leverage suggests the company’s margin recovery may have further room to run in 2026.
Peer Updates
MKS Instruments MKSI delivered strong margin performance in the first quarter of 2026 as improving demand and favorable product mix lifted profitability. Gross margin reached 47%, at the high end of guidance, while operating margin expanded to 21.8%, supported by higher semiconductor and chemistry-related sales tied to AI infrastructure and advanced PCB manufacturing.
MKS Instruments benefited from stronger volume, a richer mix of high-margin chemistry products and operating leverage, offsetting tariff-related cost pressures and higher palladium prices. MKS Instruments expects gross margin to remain around 47% in the second quarter, with management highlighting continued profitable growth, 50% incremental margin conversion on revenue gains and EPS guidance of $2.90, plus or minus 30 cents. While some lower-margin equipment mix may temper upside, MKS Instruments sees bottom-line momentum strengthening through 2026 as semiconductor and electronics demand accelerates.
ASE Technology ASX reported improving margins in the first quarter of 2026 despite ongoing investments in advanced packaging capacity. Consolidated gross margin was 20.1%, up 60 basis points sequentially, while operating margin improved to 10.1%. Within its core ATM business, gross margin reached 26%, benefiting from stronger factory utilization and an increasing mix of higher-value LEAP advanced packaging services, although Lunar New Year labor costs and depreciation from new capacity limited sequential gains.
ASE Technology expects margins to improve progressively through 2026, with second-quarter ATM gross margin guided to 26-27% and management targeting the upper end of its structural margin range by year-end. While rising depreciation from LEAP expansion may weigh on near-term profitability, ASE Technology expects stronger utilization and AI-driven packaging demand to support a healthier bottom-line trajectory in 2026.
AXTI’s Price Performance, Valuation and Estimates
Shares of AXTI have skyrocketed 590.4% so far this year compared with the industry’s 35.3% growth.
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From a valuation standpoint, AXT trades at a forward price-to-sales ratio of 44.35, significantly above the industry average. It is also higher than its five-year median of 1.48. AXTI carries a Value Score of F.
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The Zacks Consensus Estimate for AXT’s fiscal 2026 earnings implies a 168.3% improvement from the year-ago period’s level.
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The stock currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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