Optical stocks have a China problem that most -2-

Anyone buying AXT to reduce China exposure is doing the opposite. Every wafer is grown in China, every shipment needs a Beijing permit, and the company holds stakes in 10 Chinese suppliers. The risk section of its own earnings release opens with export permits. AXT is a good operator with genuine scarcity value and the biggest political dependency in the chain. The cleanest way to own the shortage is also the most direct way to own the licensing risk.

The cleaner non-Chinese options are duller. IQE (UK:IQE) (IQEPY), a Welsh wafer maker with plants in Britain, the U.S. and Taiwan, raised its 2026 growth guidance to above 30%, from 20%, on July 21. It is still in the midst of a turnaround: 2025 revenue fell to GBP97.3 million from GBP118 million, and the company lost GBP37 million before tax. On the metal, Korea Zinc (KR:010130) is among the largest refiners; it bought Nyrstar's (BE:NYR) U.S. assets on April 1 and is developing a $7.4 billion Tennessee smelter with U.S. government backing - with phased operations, and indium among 13 planned products, targeted for 2029. That is how long a real fix takes.

What next week tests

Lumentum reports earnings on Aug. 11, with Coherent following on Aug. 12. Both are guiding to sharp revenue growth: Lumentum has guided to $960 million to $1.01 billion, up from $500 million a year earlier, and Coherent has guided to $1.91 billion to $2.05 billion, up from $1.53 billion. Strong growth is already the consensus, so the beats won't move their shares much. What will is how much of each company's wafer supply runs through China, which is what the disclosures below reveal.

The useful disclosures sit lower down, in terms of how much of each company's wafer supply is grown in-house and how much comes from China. Investors should look to see whether anyone else pays cash up front to lock in wafers, which would be a measure of how little faith buyers have in the open market. And it's worth listening for whatever management says about export permits - the one thing neither company controls.

How this trade breaks

The bear case is not that the shortage is fake - it is what happens afterwards. Market-intelligence firm LightCounting's April forecast had demand for optical transceivers - the modules that use these lasers to move data over fiber - running 30% above supply, with the squeeze easing by the end of 2026. Its July report offered revised estimates on both counts: Growth for 2026 went up to 73%, and the laser shortage now looks likely to run into the middle of 2027.

That is good for near-term revenue, but it makes the backlog harder to trust.

LightCounting's reason is that almost every transceiver component is now scarce and customers have started double ordering, which inflates backlogs. The firm says the industry is starting to feel like 2000 and 2001. Backlog built on double orders is not the same as backlog built on demand, and the difference only shows once supply catches up. Coherent's book into 2028 deserves that caveat.

It also supplies the timing: LightCounting's data show transceiver sales turning down about six months before cloud capital spending does - and its model has that spending slowing from roughly 70% growth this year to 30% next year. If so, the turn in optics would arrive before the news that would explain it. Lumentum CEO Hurlston, meanwhile, runs a company that benefits the longer the shortage lasts.

The risk runs the other way too. If Beijing extends Announcement No. 10 to refined metal, everything downstream reprices at once. The Defense Logistics Agency has already asked for bids to stockpile up to 403 tons of indium over three years - more than a third of a year's global output. A purchase of that scale shows the U.S. government considers a supply disruption credible enough to prepare for now.

The market was right to identify optics as a bottleneck. Its mistake was treating every company in the chain as the same trade. Scarcity rewards businesses that control qualified wafer supply, but AXT's advantage comes bundled with the sector's largest geopolitical dependency.

From here, returns will depend less on who reports the biggest backlog than on who can keep shipping when supply catches up - or when Beijing tightens the gate.

-Jurica Dujmovic

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08-07-26 0700ET