A 78% Indium Phosphide Price Spike Reframes the Optics Cycle

The setup Capital is reorganizing around the physical limits of artificial intelligence. As foundational models scale to unprecedented revenue figures, the market is pricing in the stark reality that optical connectivity and power infrastructure are the actual bottlenecks to growth. Monday's trading session revealed a clear bifurcation: investors are actively selling enterprise software while relentlessly bidding up the physical materials and networking components required to run large language models.

What's moving

The neocloud pivot. Groq raised $350 million at a $3.5 billion valuation to pivot away from building custom AI chips and toward operating a neocloud (per TechCrunch) powered by Nvidia hardware. The strategic shift is telling. It signals that raw silicon design is becoming less defensible than controlling the actual data center footprint, securing grid capacity, and renting out compute to desperate developers.

Nvidia becomes the bank. Nvidia ($NVDA) is aggressively underwriting the infrastructure required to house its own silicon. The company is backing $105 billion in financing for an OpenAI data center in Ohio (CNBC) and investing $1.5 billion in a SoftBank data center project (TechCrunch). Furthermore, the chipmaker disclosed a $21 billion equity stake in SpaceX (per Ars Technica) after securing an exclusive arrangement to kit out its data centers. This reinforces a structural shift we noted previously: access to debt and capital, rather than just silicon availability, is dictating the pace of AI deployment.

Anthropic's revenue inflection. The foundational model builder told its investors that its annualized revenue run rate climbed to $65 billion in July, adding $18 billion in just two months (per TechCrunch). A sevenfold year-over-year expansion proves that enterprise appetite for generative AI integration is scaling fast enough to justify the staggering hyperscaler capital expenditures required to train these models.

Featured: AXT Inc ($AXTI)

The move $AXTI gained 17.55% in Monday's session to close at $95.97, driving trading volume to a robust 15.2 million shares. The violent upward move squeezed a crowded short base, as 16% of the company's 61.6 million floating shares had been sold short prior to the session, with 1.1 days to cover. The stock now trades at a steep 43.1 forward P/E and an enterprise value of 47.1 times sales, pushing its overall market capitalization to $6.29 billion.

What drove it The semiconductor materials supplier broke out following a recent report from Nomura detailing extreme price increases for the underlying substrates required to build AI data center lasers. According to the report, prices for two-inch indium phosphide wafers jumped 76% in the first half of the year to 880 yuan, while three-inch wafers climbed 78% to 3,200 yuan.

The industry is now actively weighing an additional 10% price hike in the fourth quarter to cope with an ongoing supply crunch. Because AXT manufactures the foundational indium phosphide substrates used in high-speed data transfer and fiber optic connectivity, these rolling price increases translate directly to absolute pricing power. When the core materials required to transmit data cost 78% more than they did six months ago, the economics of the entire optical supply chain shift in favor of the substrate providers.

The bigger picture The optical cycle has firmly turned. Data centers scaling for AI workloads cannot simply add more compute and power; they must network thousands of distinct accelerators together to train a single model without latency. That heavy networking requires millions of optical transceivers, which in turn require indium phosphide lasers to rapidly convert electrical signals into light.

Our dashboard reads that hyperscaler aggregate capex is now running 97.7% above last year, sitting at +2.10 standard deviations versus its 10-year history. As these major technology companies deploy capital at a historically saturated pace, the physical supply chain is fracturing at the substrate level. AXT is riding a pure commodity expansion cycle where the structural demand for optical interconnectivity is drastically outstripping global wafer supply.

However, AXT's current financial profile presents a stark tension. While top-line revenue is growing at an aggressive 164.8% year-over-year, the company's net margin sits at just 3.2%. Investors are betting that the extreme pricing power detailed in the Nomura report will finally flow through to the bottom line. The market is attempting to front-run a profitability inflection, expanding the stock's valuation multiple to levels that completely detach from historical semiconductor norms.

Across the tape

Optical networking and memory names largely defined the session's strength against a broader technology fade. While $SMH dropped 0.22% and $IGV shed a sharp 2.07%, Cerebras ($CBRS) gained 15.07%, Semtech ($SMTC) rose 9.88%, Sandisk ($SNDK) added 8.88%, and Credo ($CRDO) advanced 8.82%. The institutional buying was highly concentrated in the physical connectivity, storage, and networking hardware required to string AI infrastructure together.

Meanwhile, traditional software continued its structural repricing. Cellebrite ($CLBT) fell 6.28%, extending a fundamental reset we flagged last week when a lowered subscription forecast broke its pure-growth narrative. ZoomInfo ($GTM) also dropped 7.16% as enterprise seat-based software models struggle to defend their premium multiples in an environment demanding rigorous cost controls.

Underneath the equity tape, crude oil pushed higher, with WTI settling at $85.15 and Brent crude testing $90 (per CNBC) amid rising geopolitical tensions in the Strait of Hormuz. The rising cost of energy remains a crucial variable for data center operating expenses.

What to watch

• AXT earnings: The materials provider is scheduled to report earnings on October 29. The street's mean price target sits at $91.60, a level the stock just cleanly cleared. The single number that matters is the net margin—it must expand from its current 3.2% to prove that substrate price hikes are actually sticking and generating cash.
• SpaceX valuation updates: With Nvidia officially disclosing a substantial $21 billion stake in the aerospace company, SpaceX's internal valuation marks and its demand for server capacity will serve as a high-profile proxy for physical AI deployment.
• Model revenue sustainability: Anthropic's staggering $65 billion annualized run rate sets an incredibly high bar for the industry. Watch for enterprise churn metrics over the coming quarters to confirm whether these model deployments are sticky business operations or just experimental corporate budgets.