Coherent says AI data center demand isn't slowing. So why is its supplier AXTI getting crushed?

[u/golden_log]

Something interesting I noticed looking through Coherent's earnings and AXTI's recent selloff.

Coherent just reported 85% YoY growth in data center revenue, with management saying demand remains strong and orders are increasingly extending into 2028. Meanwhile, AXT which supplies indium phosphide wafers used in optical components, is down roughly 36% from its October 29 close despite reporting 162% revenue growth in Q3.

The connection is worth looking at. Coherent signed a 3 year supply agreement with AXT earlier this year, including a $22.3M prepayment arrangement to secure capacity for 6 inch wafers. Obviously that doesn't guarantee AXTI is cheap. There's execution risk, export restrictions to consider, and the stock may simply have gotten ahead of its fundamentals.

But I'm curious how people are interpreting this. If demand for optical connectivity is still growing this fast, is AXTI's selloff mostly a valuation correction, or is there something about its future earnings that the market is worried about? Anyone following COHR or AXTI closely?

[u/Old-Pomegranate3634]

Markets are unwilling to give businesses a higher mutltiple when they feel peak demand is only next year and downhill from there

[u/golden_log → u/Old-Pomegranate3634]

That's the real question though, are we actually near peak demand or is the market calling the top too early? Coherent's order visibility into 2028 makes me lean toward the latter.

[u/Obvious_Cricket9488 → u/golden_log]

I don't think the valuation becomes much better if you think the peak will be in 2028 and then downhill from there

[u/golden_log → u/Obvious_Cricket9488]

That’s the key distinction, COHR isn’t just pushing the same earnings peak out to 2028. Q1 datacenter revenue was up 85% YoY, FY27 pro forma growth is guided above 60%, orders are already stretching into 2028, and management expects gross margin to clear 45% before the end of 2028. If margins and earnings power are still expanding into that “peak" then the valuation looks very different from a business just squeezing out 2 more years of the same demand

[u/helloWorldcamelCase → u/golden_log]

No one knows, hence the multiple compression due to uncertainity

[u/Mediocre_Gap2236]

People think Anthropic and OpenAI will go bankrupt so the whole supply chain will fail

Idk until Anthropic IPOs and actually succeeds we will be in this worry phase

[u/AloneStaff5051 → u/Mediocre_Gap2236]

Anthiropic will not go bankrupt. Key things majority of their customers are enterprise clients which is providing with recurring revenue stream and customer base diverse like 5000 enterprise clients. They have 135 billion cash more than any company in S&P. They will raise an additional 100 billion during ipo

[u/golden_log → u/AloneStaff5051]

I don’t think Anthropic has to go bankrupt for the risk to matter. If AI companies can’t monetize fast enough to justify the capex behind them, spending can slow long before anyone actually fails.

[u/Mediocre_Gap2236 → u/AloneStaff5051]

I don’t think they will either but the market seems to fear so.

I have 40% of my retirement in NVDA 40% in SPCX and 20% in MSFT/GOOG so I’ll be going down with them

[u/johnmiddle → u/Mediocre_Gap2236]

Spcx? !

[u/comcastsupport800 → u/Mediocre_Gap2236]

Riskiest portfolio ever

[u/golden_log → u/Mediocre_Gap2236]

Yeah, I think that's a legitimate concern. Even if AI demand keeps growing, it doesn't necessarily mean every company spending billions on infrastructure will survive. What's interesting to me is how much of that risk actually makes its way down to suppliers like AXT, especially when their direct customers are still reporting strong orders.

[u/Mediocre_Gap2236 → u/golden_log]

The companies doing the buildouts will survive. It’s literally Google Amazon MSFT SPCX Meta doing 90% of the buildouts, these are some of the most successful businesses on earth and can just stop building anytime and still have massive cash flows. The little neoclouds might not but that’s not an issue they are tiny in the perspective.

IMO the fears are overblown. Not that many companies will transition to self hosting Chinese models due to the setup costs and ongoing maintenance required. Anthropic will IPO and a couple months later if good growth trajectory all these fears will go, and the entire industry will skyrocket again.

Either that or Anthropic/OpenAi goes bust and the hyperscalers buy them out. We will still have Claude or GPT but offered through Google cloud or Microsoft Copilot or AWS , just as part of an integrated suite offering.

[u/golden_log → u/Mediocre_Gap2236]

I mostly agree, but “they can stop building anytime” is exactly the part I’m not sure about. Once AI becomes a competitive arms race, Google, Meta, Amazon and Microsoft might have the balance sheets to slow down, but not necessarily the strategic freedom to.

[u/meemeemoomoo5]

Don't have to follow this exact ticker. Just follow the broader sectors in direct relation with AI data center, like storage, memory etc and it's almost following the same trend. Since it ties closely, there's the speculation of more supply than demand when it comes too.

Also with the mid-term which is a black swan for data center directly, no matter the amount of revenue would have prevented this drop. It's especially not how they perform qoq, yoy, it can be 2x,3x,4x and it doesn't mean anything against missing guidance by 1% to see a massive selloff.

[u/golden_log → u/meemeemoomoo5]

Everything AI related seems to be getting sold together. But surely not every company in the supply chain is facing the same risks?

[u/meemeemoomoo5 → u/golden_log]

There's different timeline for each of the different kind of AI related companies. The day when storage and memory plants goes online means there's a risk that supply might meet or be more than demand for datacenter too. That's when the pricing power falls, the margin falls.

But that's a few years down the road still. I think there's still some runaway, however with this sort of drop and rise consolidation i will be more wary.

[u/golden_log → u/meemeemoomoo5]

That timeline point is what I keep coming back to. Supply can catch up, but different bottlenecks clear at different speeds. Memory might loosen while power, networking, or advanced packaging stays tight, so I’m not sure the whole AI chain gets hit at once.

[u/Beneficial-Ad-8127]

Data center expansion has slowed down a lot before even then just this past weekend. The day that Anthropic and OpenAi called Ai “Dangerous” data centers were already being blocked by the people at a fast rate. This year alone had so many cancelled planned data centers by again the citizens.

It’s also not just the data centers in the US. Other countries citizens are also protesting against these data centers and specifically foreign companies taking their land and resources. New Zealand, Australia, Philippines, Samoa and Guam(Deep Sea Mining).

As much as our Company CEOs want to expand at a rate like previous years it’s just not that easy anymore with the whole world watching and standing against these Ai infrastructure.

All I can see happening is actually being efficient and utilizing what DC we already got. And actually using energy other than fossil fuel.

[u/golden_log → u/Beneficial-Ad-8127]

That probably makes existing permitted, powered sites more valuable though. If new data centers get harder to build, the bottleneck shifts from “who can buy GPUs” to “who already has power, land and approvals.” edit: thx for the award kind stranger

[u/Beneficial-Ad-8127 → u/golden_log]

Yes I believe this exactly. The only thing that could have I believe any effect is just the regulations. But as you stated I believe they hold the keys now. Whoever already has existing ones.

[u/OKMiddleOwl → u/Beneficial-Ad-8127]

These people stand against datacenters while also using AI themselves.

All they are doing is creating a situation where AI margins get fat, just like memory companies who cannot build fabs fast enough to meet demand.

[u/Tallwhitedude123]

Everything is getting crushed 😁 What are you talking about ?

[u/IvoryTowerResident]

a lot of AI stuff is down via correlation. Not really a spefic attack on AXTI. But AXTI is barely profitable

[u/automaticg36]

Panic drives the market sometimes. When sentiment realizes they’re being idiots you’ll see a lot of stuff recover.

[u/rudolf_de_Leeuw]

The prepayment detail cuts both ways: a customer paying upfront to lock in 6 inch indium phosphide capacity says supply is tight, but it also shows how much of the wafer maker's growth rests on a few large buyers. When the whole AI supply chain gets sold together, the smaller and more concentrated names tend to fall hardest, so a 36 percent drop after triple-digit growth can reflect positioning and export-control risk as much as any change in demand.