AXT Inc ($AXTI) and Tower Semi ($TSEM) Are the Optical Shortage's Quiet Winners

Everyone is talking about AI chips. Nobody is talking about the cables that carry the data between them. That is a mistake, and $AXTI and $TSEM are here to collect on it.

A Seeking Alpha deep-dive flagged something genuinely interesting this week: Lumentum ($LITE) is sold out through 2029, with up to 70% of its product demand going unmet through next year. That is not a typo. The optical component market is in a full supply crisis, driven by AI data centers that need massive amounts of fiber interconnect to function. When the headline name is completely constrained, smart money looks upstream.

That is where AXT Inc ($AXTI) comes in. AXT is a substrate supplier, specifically indium phosphide, which is the raw material that makes high-speed optical chips possible. The company is tiny, with a market cap well under $1 billion, and it gets almost zero mainstream coverage. But it is currently posting approximately 46% revenue growth driven directly by that optical component demand surge. The catalyst here is structural: you cannot build more Lumentum capacity without more indium phosphide substrates, and AXT is one of a very small number of companies that supply them at scale.

Then there is Tower Semiconductor ($TSEM), which plays in silicon photonics, a slightly different part of the stack but equally supply-constrained. Tower is reporting nearly 15% revenue growth and a 35% EBITDA margin in its photonics segment, which the Seeking Alpha analysis notes is outpacing global foundries. For a mid-cap foundry that most retail investors have never heard of, those are serious numbers. The bear case on Tower is that it is still foundry-dependent, meaning any slowdown in customer orders hits its utilization rate fast. But with AI infrastructure buildout showing no signs of deceleration, per ASML's recent commentary about receiving customer interest through 2030, Tower's order book looks well-supported.

The bear case on AXT is simpler: it is a commodity substrate supplier, so pricing power is limited and margins can compress if competitors scale. But the two-to-three year demand runway from the optical shortage gives it a window that most small-caps never get.

In a market where the AI trade has become crowded enough to give even Jensen Huang pause, finding a 46% revenue grower that still gets zero airtime on CNBC is genuinely refreshing. Sometimes the best seat at the feast is in the kitchen.