Applied Optoelectronics (AAOI): Volume Ramp Up Remains On Track
Q2 Earnings Report
“Look at Jensen, he invests in almost every company that’s photonic.” - Intel CEO, Lip-Bu Tan
AAOI has become a popular stock amongst the retail community, and for good reason.
There’s not a single quality stock I know about in the market that has the potential revenue ramp up that is possible with AAOI over the next 18-36 months.
It reminds me of NBIS back when it traded at ~$75. It was trading at 2.4x ARR when ARR was projected to 8x over the following 12 months. NBIS then went from $75 →$298 before pulling back slightly now to $186.
AAOI is at a very similar revenue inflection point now…just on an even more bullish scale.
My personal AAOI position:
I’ve now held AAOI for a while with an average cost at $133. It used to be in the $150s but I took advantage of the recent dip we saw down to ~$80 to slowly lower my average cost basis.
It’s now my fifth largest position behind LMND, OUST, NU, and AMZN - you can see the entire portfolio (and much more) as a paid subscriber.
I’m inclined to make AAOI an even larger part of the portfolio but I’m just being a bit cautious as we approach new highs on the indexes again.
Contents
AAOI Background
Optics/AAOI TAM
AAOI Earnings Report
AAOI Valuation
Company: Applied Optoelectronics
Ticker: AAOI
Headquarters: Sugar Land, Texas
CEO: Dr. Chih Hsiang (Thompson) Lin
Market Cap: $10.72B
NTM Fwd Sales Multiple: 5.44x
AAOI Background
This will be a very brief AAOI overview.
AAOI fabricates its own Indium Phosphide laser chips in-house and also manufactures the optical transceiver modules those lasers power. Because AAOI grows its own laser material (InP), it controls the entire supply chain whereas almost every peer is constrained.
Lasers are, in the words of the CEO: “The biggest bottleneck right now for the transceiver business.”
AAOI currently has two segments:
Data centre transceiver business (100% of my investment thesis)
Cable television (CATV) amplifier business - a smaller, profitable business but one I have little interest in looking out for the next 3 years.
The company is in the middle of the most aggressive manufacturing expansion and volume ramp up in its history (and arguably one of the most aggressive expansions in the market) looking to 25x their manufacturing space. The product roadmap is currently 100G and 400G, with 800G as the near term inflection and 1.6T as the next standard as well.
The wave after that is co-packaged optics (CPO) where the laser source moves from a pluggable module directly onto the switch package. AAOI’s ELSFP laser module (the external light source that CPO needs) is targeting ~400,000 units per month by 2028.
This ELSFP would be an earlier story but as per the CEO:
“We just can’t make enough of them to be involved in their current first-generation deployments because there’s just not enough capacity. We have to prioritize our ability to make lasers for our own transceivers first.”
I’ll try to make it abundantly clear throughout this article, but I think you can gauge from what I’ve said so far… AAOI is a company not short on demand.
Customer demand even exceeds the planned capacity targets by another 20%.
This makes AAOI currently purely an execution bet - an execution bet that the manufacturing ramp up in Houston delivers on schedule. If it does, and forecasts around gross margins, ELSFP volumes, and 800G/1.6T volumes are accurate…then AAOI is, in my opinion, one of the better bets in the entire market today at sub $11B MC.
Before we move on, a quick word about TrendSpider - the charting platform that I use.
TrendSpider is running a weekend Sidekick AI Sale. You can save up to 45% on TrendSpider and receive a free one-month Sidekick upgrade.
If you manage your own portfolio, here are a few ways TrendSpider can fit into your research process:
- Group Strategy Tester to run one or multiple strategies across an entire watchlist, portfolio, sector, or index, then compare the results in one sortable table
- Claude Opus 5 in Sidekick for advanced market research, chart analysis, backtest interpretation, portfolio analysis, and custom indicator workflows
- New Segments & KPIs data covering business and geographic segments, profitability, capital expenditures, and company-specific KPIs for approximately 1,500 major U.S. companies
If this sounds useful for your process, check out TrendSpider's Sidekick AI Sale and save up to 45%.
Disclosure: I may receive a commission if you sign up or make a purchase through links in this post.
The TAM
The optics market in general is massive and we’re in the very early innings.
Let’s start big picture.
Goldman have put a forecast out for the total addressable optical networking market to be worth ~$154 billion which is 9x from today. Whether this holds true or not, it’s likely a directionally correct signal for what connectivity infrastructure is worth in a world going through the largest tech revolution of all time.
TrendForce have put out numbers too on the combined value of the CPO and NPO market to expand from ~$100 million in 2025 to $39 billion by 2030 with the majority of that growth being in 2028 and 2029. They also put out forecasts for the pluggable transceiver market to generate ~$26 billion in revenue by 2030. This means their estimates total to ~$65 billion (40% of Goldman’s and also two years further into the future).
For the sake of being conservative, most of the analysis below will work from TrendForce.
Now AAOI does not compete across the full $65 billion / $154 billion market. They compete in pluggable transceivers today (mainly 2027-2028) and are building into CPO laser supply for 2028 onwards.
On the transceiver side, AAOI is guiding towards 930,000 units per month of 800G and 1.6T by the end of 2027. With that equating to ~$471M/month ($5.6B annualized) that’s ~20% of the $26 billion forecasted pluggable transceiver market by 2030.
On the CPO side, AAOI is targeting 400,000 ELSFP laser units per month by 2028. Estimated ASPs are ~$500 per module which equates to ~$200M per month from CPO lasers alone ($2.4B annualized) against a $39 billion forecasted CPO market.
This gives AAOI ~6% of the potential CPO market which gives them some room for growth.
Put this into perspective though in ~2030. At a current market cap ~$11B, a business generating $6-8 billion in annual revenue across transceivers and CPO laser supply (against a total TAM of between $65 and $154 billion) is trading ~1.4-1.8x that potential revenue run rate.
Q2 2026 Report
I will dive into the numbers in this report because that’s what we do in earnings reports, but I think it’s important to caveat with the fact that the numbers in H1 2026 are not central, nor that important, to my investment thesis in any way.
The reason for this is because AAOI is a H1/H2 2027 onwards play in terms of volume ramp up.
That’s when we should start to see the $471M / month numbers which is a 12x ramp up from FY25 revenue.
Most of what I care about today is:
Manufacturing: The story now is predominantly about manufacturing execution. Demand is through the roof and the cap for AAOI right now is whether or not they can hit that 930,000 modules per month goal by the end of 2027.
Updates of 800G ramp up: Management have made it abundantly clear their timelines for 800G/1.6T ramp up. It was never going to be a Q2 story. It was always Q3 and Q4 and then ramping up nicely throughout 2027 so numbers in Q2 were never going to be backing up this thesis.
Anyway, here’s a look at Q2 numbers:
Demand:
Q2 was the fifth consecutive record revenue quarter.
Revenue grew 86% YoY and 27% QoQ.
56% of revenue came from data centre products and 42% from CATV.
Most of the data centre revenue came from 400G and 100G with 11.9% of data centre revenue coming from 800G (still immaterial but this should start to change in Q3).
Profitability:
EPS beat estimates and management guidance.
Returned to non-GAAP profitability for the first time in years with non-GAAP net income of $5.5M vs a guidance of -$2.5M - +$2.8M.
Guidance:
$1.1B guided for FY26 meaning we’re looking at ~$485M guided for in Q4 (2x what is guided for in Q3). This is where execution risk becomes quite material for AAOI. Management wouldn’t be guiding here if this wasn’t feasible but Q3/Q4 will be almost a make or break for investors in terms of their trust in AAOI management. AAOI management do have a slight reputation over overpromising and underdelivering in the past. I sense this time is different, but it’d be naive not to be aware of this as a risk.
Long-term gross margin target remains at ~40% with ELSFP laser contribution being ~50-65% gross margins.
Important notes from earnings call:
“We continue to expect by the end of this year that we will be capable of producing over 650,000 pieces of 800G and 1.6 terabit products per month. By the end of next year, 2027, we continue to expect to grow our production capacity to be able to produce over 930,000 pieces of 800G and 1.6 terabit products per month, with over half of that output coming from Texas.”
As I touched on above, the most important part for me for Q2 earnings was the manufacturing capacity trajectory.
One year ago, AAOI had 65,000 square feet of manufacturing space. Today they have 1.6 million square feet in the Greater Houston area (that’s 25x in footprint).
Here’s the ramp up projections management have given us:
Q2 2026: 200,000 monthly capacity for 800G/1.6T units
End of 2026: 650,000 monthly capacity for 800G/1.6T units
End of 2027: 930,000 monthly capacity for 800G/1.6T units
An 800G transceiver at current ASPs generates ~$400-500 per unit. A 1.6T transceiver is much higher.
So 930,000 units per month by the end of FY27 (predominantly 800G and 1.6T though unsure on the split) is where we start to see this potential for $5-7 billion in revenue.
It’s where management’s $471M/month figure comes from.
“We also discussed our plans to increase our manufacturing capacity for our external light source or ELSFP. That's for co-packaged optics or CPO". we anticipate ramping production later this year and into 2027, ultimately culminating in about 400,000 pieces per month in 2028.”
Modelling this into a revenue figure takes guesswork. Above, I estimated the ASPs to be ~$500 a unit based on:
ELSFP lasers being 6x the die size of a transceiver laser.
Requiring 300mW output vs 70-100mW for 800G/1.6T.
DWDM variants are much more complex.
To me this implies material premium over a standard transceiver component which has an ASP ~$400-500 per unit. I think $500 is therefore a base/conservative number to work from.
$500 ASP at 400,000 units per month is $200M per month (or $2.4B annualized) on top of the potential $5.6B we have annualized in FY28 for the transceivers.
What’s more, the ELSFP business carries materially higher margins than the transceiver business meaning on approximately half the revenue, we’ll likely see a similar gross profit figure.
“For laser, the gross margins is about 55% to 65%. For ELSFP, the gross margin should be more than 50%.”
“Our ability to deliver revenue in general, and specifically when it comes to 800G products, is limited by our production capacity right now…if we could produce more, we could ship more right now.”
Just a final reminder that AAOI is a supply constrained company and not a demand constrained company.
Valuation
The stock is expensive if you look at today’s multiples relative to today’s revenue (~17x sales).
But the valuation compresses to sub 2x NTM sales on the mid-2027 run-rate management is guiding towards with a 12x ramp in revenue over 24 months from FY25.
