Applied Optoelectronics (Nasdaq: AAOI) has been one of our portfolio's biggest winners, up 350% year-to-date and 450% over the past six months. It hasn't been an easy name to accumulate, given the stock's significant volatility, driven in part by lumpy timing of AAOI's revenue.
Q1 results came in roughly in line with other AI networking companies that have reported this week, with revenue of $151.1M up 51% year-over-year and 13% sequentially. The more material development was the forward guide: management now expects 2026 revenue above $1.1B, well above the prior consensus of $962M and compared to $455.7M in 2025. The updated guide implies 141% year-over-year growth, and with Q2 guided to $180M-$198M, the math points to a heavily back-weighted year as clearly the bulk of the revenue is expected to arrive in the second half.
Significant Ramp Expected Q3 2026 through Q2 2027
AAOI joined a growing list of AI networking management teams talking about a very strong 2H. It’s unlikely the Street rewards forward-looking guidance for two quarters out especially with a tricky supply chain environment. However, it's worth a minute to look at the acceleration that AOI is guiding to, with the model below showing about 70% QoQ growth between Q3 and Q4.
Management sees an even further ramp into 2027 with an indication they could see $471M in revenue per month at full utilization. The revenue ramp aligns with what we covered last quarter, which was a roughly 5X increase in monthly transceiver output.
However, analysts on the call were cautious as they pointed toward limited InP capacity as an industry-wide issue that AAOI has to overcome to reach these targets. Typically, for an aggressive forecast, analysts also want to see progress in the current quarter, but Q1 offered 13% QoQ growth (a solid print but not helpful for the forecasted numbers that are much higher). Overall, management has some serious execution milestones to reach in the near future, and that was the overall tone on the call.
Here is a sample of what was stated on the call regarding the well-known InP shortages: “Jarren, we see a shortage of indium phosphide laser manufacturing capacity across the industry right now, and we think that's going to persist and even get more acute with the advent of ELSs, as Thompson mentioned. That's why we see this need to really expand our — phosphide fabrication capability pretty dramatically over the next 12 to 18 months.”
We've covered indium phosphide at length for a few years, primarily in our Lumentum and Coherent analyses. InP is the substrate that produces high-speed lasers for optical transceivers, and is a major constraint in the networking industry right now. According to management, they have almost 1 year of inventory on hand and are in discussions with “a good line of sight” to avoid a shortage. Here was the tone on the call, which I’d characterize as rather vague:
“Chih-Hsiang Lin, CEO
Right now, we record — supplier with some kind of discussion — sorry, not much we can say. But 4 of them are outside of China. So I would say right now, we should have enough inventory minimal almost 1 year. But since the volume, we increased surface, we are making calls with all the suppliers.
Stefan Murry, CFO
I would say we've got good line of sight into how we think we can not see the shortage there. But we can't say too much about it specifically at this point because a lot of it is under discussions.”
In another exchange, AAOI offered an important point, which is the company has been around since 1990 and is vertically integrated with very little dependency on external suppliers. As stated, they’ve made lasers in-house for a few decades, and they call this out as the single biggest reason they have avoided shortages compared to competitors. The company also stated competitors face lead times of 21 to 24 months, offering AAOI an important incumbency.
“Stefan Murry, CFO:
Right. Great question. So as I said earlier, I think indium phosphide capacity is critical right now. The fact that we have our own in-house laser manufacturing capability is one of our key advantages. Certainly, when you talk to customers, that's one of the big things that they like about us, especially now that we're seeing shortages across the industry. So our fab expansion is well underway.
As Thompson mentioned, we've got a number of critical pieces of equipment and coding machines and others that are in various stages of either being delivered or being qualified. It does take a pretty extended period of time to qualify a new piece of laser manufacturing equipment, as you can imagine, you don't want to take a risk of having an unknown quality issue there.
So a lot of that is already here and already undergoing qualification or it's very close to being here. And that's why we can be pretty confident that our capacity is going to be where we need it to be.”
An area of confusion that management cleared up on the call is that quoted capacity numbers take about 1-2 quarters to recognize in revenue. That is why management discussed 100K units per month yet will not see that revenue until Q3.
800G and 1.6T Product Mix
When we examine further how AAOI can guide for 70% growth QoQ at the midpoint in 2H, it helps to look at current product mix versus anticipated product mix.
In the current quarter, only $4.6M was from 800G for 5.6% of data center revenue and 0% of revenue was 1.6T. The far majority of the data center was still 400G, which grew 10X year-over-year.
Over the 12-18 months, management is building toward 46% of revenue driven by 800G and 35% of revenue driven by 1.6T. In other words, two product categories that currently represent 3% of revenue will represent 80% of revenue.
Here is what that ramp looks like in terms of transceiver numbers:
“Exiting Q1, our total manufacturing capacity approached 100,000 units per month of 800G and 1.6 terabit capacity. Looking ahead, we expect to continue to rapidly expand our production capacity to approach 150,000 per month of 800G and 1.6 terabit this quarter. As a reminder, we 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 with about 30% of that output coming from Texas as we expand into additional facility space and bring new production online.
By the end of next year, 2027, we 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. These investments reflect measured scaling of our footprint while aligning with our strong and growing customer demand and qualification progress across both 800G and 1.6 terabit products.”
Last quarter, management announced its first 1.6T volume order from a hyperscaler, and added another 1.6T hyperscaler plus two 800G customers in Q1. Also important to note, management stated that 1.6T will run on the same production lines as 800G and even 400G – which means they do not have to build a new factory, and can offer speed to market for a concurrent ramp: “As I mentioned, this automation platform is also highly flexible, enabling us to produce across multiple generations from 400G to 800G to 1.6 terabit using many of the same techniques and equipment.”
ELS Lasers for the CPO Opportunity
The ELS thesis is that CPO will drive sustained demand for high-power lasers, which is exactly the product category where AAOI's vertical integration is most differentiated. To meet that demand, the company plans to expand laser fabrication capacity in Texas by roughly 350% by the end of 2027.
“We believe that in the future, CPO will continue to drive increased demand for high-power lasers, and we plan to continue to expand our laser manufacturing capacity in Texas in order to accommodate these future growth drivers. We expect to further expand our laser fabrication capacity by around 350% by the end of 2027.”
The specific bet is on External Laser Source (ELS) modules, which is the remote laser packages that provide light into co-packaged optical engines. ELS is a smaller market than transceivers today, but is expected to scale with CPO adoption.
Financials:
By Royston Roche
Q1 Revenue grew by 51%
AAOI Q1 revenue grew by 51.4% YoY and 12.6% QoQ to $151.1 million. However, missed estimates by 1.8%. Revenue growth accelerated by 17.5 percentage points from 33.9% YoY growth and 13.2% QoQ growth in the previous quarter.
Management guided Q2 revenue in the range of $180 million to $198 million, implying a YoY growth of 83.6% and 25% QoQ at the midpoint. Missed estimates by 1.9% as growth pushed to 2H. The more material development was that the management raised full-year 2026 revenue guidance to over $1.1 billion, up from the prior guidance of over $1.0 billion issued during Q4 results, implying 141.4% YoY growth for the full year.
Key Segments
Data Center Revenue Growth of 154%
Q1 Data Center revenue grew by 154% YoY and 8.7% QoQ to $81.4 million. 100G products revenue increased by 36% YoY, while sales for the 400G products increased tenfold YoY. In the first quarter, 41.9% of data center revenue was from 100G products; 46.7% was from 200G and 400G products, 800G transceiver products accounted for 5.6% of revenue, and 5.6% was from 10G and 40G transceiver products. Management expects a sequential increase in Data Center revenue in the next quarter.
CATV Revenue
CATV revenue grew by 3.6% YoY and 23.8% QoQ to $66.8 million. The revenue came close to the higher end range of the guidance range of $61 million to $67 million. Looking ahead, management expects CATV revenue to be between $75 million and $80 million for Q2, implying a YoY growth of 38.3% and 15.9% QoQ at the midpoint. Looking further ahead, management expects to generate over $325 million annually in CATV. The vast majority of the CATV revenue this year is expected to be amplifiers, and they do anticipate generating some revenue from the software solutions this year.
Telecom/Other Revenue
Telecom revenue was down (12.9%) YoY and (49.9%) QoQ to $2.6 million. While the other revenue, which is negligible, was down (8.6%) YoY and up 19.3% QoQ to $0.34 million.
Margins
Q1 adjusted gross margin was down 150 basis points YoY to 29.2% due to higher data center revenue and missed the guidance of 30%. Management remains committed to its long-term goal of returning 40% adjusted gross margin and the CFO, Stefan Murry, said in the earnings call, “While we do expect continued gradual improvement in gross margins, we continue to expect that the revenue mix in data center in the short term will be a slight headwind. We remain committed to our long-term objective of returning non-GAAP gross margins to around 40% and believe that this goal is achievable as our mix shifts towards higher-margin products and as we capture additional efficiencies across our operations.”
Q1 adjusted operating loss was ($7.3 million) or (4.8%) of revenue compared to ($4.8 million) or (4.8%) of revenue in the same period last year.
Q1 adjusted net loss was ($4.9 million) or (3.3%) of revenue compared to ($0.9 million) or (0.9%) of revenue in the same period last year. Management has guided Q2 adjusted net income in the range of a loss of ($2.5 million) to income of $2.8 million, with a midpoint of $0.20 million or 0.1% of revenue.
EPS
The company reported Q1 adjusted EPS of ($0.07) and missed the estimates of ($0.05) primarily due to higher data center revenue mix. Management has guided Q2 adjusted EPS in the range of ($0.03) to $0.03, the midpoint implies breakeven in the next quarter.
Cash Flow and Balance Sheet
The company’s cash flows were weak in Q1 due to high working capital and capex to support future growth.
- Q1 operating cash outflow was ($85.4 million) or (56.5%) of revenue compared to ($50.9 million) or (51%) of revenue in the same period last year.
- Q1 free cash outflow was (143.6 million) or (95%) of revenue compared to ($87.2 million) or (87.3%) of revenue in the same period last year. Capex increased 105.1% YoY to $58.2 million.
- The company had cash & short-term investments of $449.4 million compared to debt of $206.5 million. The company issued shares worth $382.5 million in Q1.
- Inventories grew by 12.6% QoQ to $206.2 million to support future growth.
Conclusion:
My bull case for AAOI is that hyperscaler demand for high-speed optics is intense, and has outpaced the industry’s ability to make them. AAOI offers vertical integration on lasers and is publicly committing to a significant step-up in revenue come 2H with over 141% growth this year.
However, the stock was down after hours because Q1 offered average growth for an AI networking stock, forcing investors to wait for the next blowout quarter. Beyond that, any small slip in InP capacity or equipment delivery could trigger an adjustment to expectations.
Or the opposite could happen and AAOI could execute flawlessly on all fronts.
Please note: The I/O Fund conducts research and draws conclusions for the company’s portfolio. We then share that information with our readers and offer real-time trade notifications. This is not a guarantee of a stock’s performance and it is not financial advice. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis. Beth Kindig and the I/O Fund own shares in AAOI at the time of writing and may own stocks pictured in the charts.
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