AXT, a Fremont, California maker of compound-semiconductor substrates — the polished crystal wafers on which laser and radio-frequency chips are grown — reported a June quarter that looked nothing like its own recent history. Revenue reached $47.6m, up 164.8% from a year earlier. Indium phosphide, the material of choice for the high-speed lasers inside optical transceivers, contributed a record $30.7m of that. The company guided the September quarter to roughly $66m.

The margin move is the more striking number. Gross margin was 7.97% in the June 2025 quarter and 44.9% in the one just reported, the sixth consecutive quarter of expansion. Trailing-twelve-month gross profit roughly doubled in a single quarter, from $20.5m to $40.4m — the June quarter alone produced more gross profit than all of 2025.

Three suppliers, and a permit office

What makes the operating leverage durable is scarcity. Sumitomo Electric, JX Metals and AXT together control 80-90% of the indium phosphide substrate market, and both Japanese rivals are spending heavily to expand — JX has flagged up to ¥120bn of capital expenditure. For now AXT's output is fully allocated; management says it is declining orders it cannot serve, and customers are paying to reserve capacity. Lumentum, the optical-component maker, signed a supply agreement running to the end of 2031 with an initial $43.5m deposit and a second $43.5m payment due in 2028. Coherent prepaid $25.4m, Casella $22.3m. Backlog exceeds $100m and is growing faster than shipments, stretching visibility to three or four quarters from the historical one or two.

The binding constraint has not been demand but Beijing. AXT manufactures through its Tongmei subsidiary in China, and gallium- and indium-bearing shipments outside China require export permits. That is why the fourth quarter of 2025 came in below guidance and the first quarter of 2026 beat it — permit issuance moved, not orders. Management now calls permits predictable rather than a showstopper, and the $66m guide counts only volumes already licensed or exempt.

The price has come down and is still demanding

None of this has produced a settled share price. AXT closed at $36.97 on 29 July, ran to $93.72 by 17 August, then fell 24.8% in four sessions to $70.48. Against May it is down 41.8%. Even so, the shares change hands at 87.6 times trailing gross profit and 16.2 times forward sales. Reported earnings only just turned positive, which makes the trailing price-to-earnings ratio useless; on consensus it is 81.5 times 2026 earnings and 31.8 times 2027 — and reaching 2027 requires revenue to more than double again, to $460.6m. The multiple has roughly quartered since May. It still prices near-flawless execution against two well-capitalized Japanese rivals.

Wolfspeed: the AI line is real and too small

The contrast within compound semiconductors is Wolfspeed, the Durham, North Carolina silicon-carbide maker that emerged from a prepackaged Chapter 11 last September with debt cut from about $6.7bn to $2bn. Its case for AI relevance is silicon carbide in 800-volt direct-current rack power supplies. On 19 August it reported June-quarter revenue of $149.6m, down 24.1% and roughly a third short of consensus, with gross margin at -24.6% and operating cash flow of -$54m. AI data-center revenue more than doubled over the fiscal year and grew about 20% sequentially — off a base too small to offset softening automotive demand, which remains roughly 70% of silicon-carbide consumption. Consensus has revenue falling another 15.2% next year, which is why Wolfspeed's forward price-to-sales ratio, at 2.10, sits above its trailing 2.03. No earnings or gross-profit multiple exists: gross profit is negative.

What actually moved the month

Every discrete- and power-semiconductor name in this group fell over three months, from Vishay's 26.4% to Wolfspeed's 61.3%. The common cause is the discount rate: the 30-year Treasury yield touched 5.33% in mid-August, its highest since 2007. The sharpest recent faller, fiber-laser maker nLIGHT, dropped for a different and specific reason: it postponed about $17m of shipments on heightened Chinese inspections of dual-use goods, despite record quarterly revenue — the same export machinery that gates AXT.

Vishay, the broad-line discrete and passive component maker, is the group's quiet diverger. Adjusted revenue of $919m grew 20.5% year on year, adjusted gross margin reached 22.6%, and the September guide of 24% arrives a quarter ahead of plan against a 30.3% margin earned in 2022. Book-to-bill was 1.32 and backlog rose 18% in the quarter to $1.9bn. The shares trade about 38% below the $50 at which the company sold stock in June, at 17.4 times 2027 consensus earnings.

The setup

Where it stands — AXT's numbers have inflected hard; the share price has retraced 41.8% from May yet still embeds years of triple-digit growth. Would confirm — September-quarter revenue lands at or above the $66m guide with gross margin holding above 40%. Would invalidate — Chinese export permits tighten again and AXT guides December revenue below September's. Watch next — AXT's September-quarter report, due late October, plus its stated exit-2026 indium phosphide capacity of about $60m a quarter. Valuation — 87.6x trailing gross profit and 50.5x forward; 81.5x 2026 consensus earnings, 31.8x 2027.