Should You Buy, Sell or Hold AAOI Stock Ahead of Q2 Earnings?

The Zacks Consensus Estimate for revenues is currently pegged at $191.13 million, suggesting growth of 85.66% from the year-ago quarter’s reported figure. 

The consensus mark for earnings is pegged at 3 cents per share, unchanged over the past 30 days and significantly narrower than the 16-cent loss reported in the year-ago quarter.

Consensus Estimate Trend

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AAOI’s earnings beat the Zacks Consensus Estimate in two of the trailing four quarters, and missed twice, the earnings surprise being negative 9.58%, on average. 

Let’s see how things have shaped up prior to this announcement.

Key Factors to Note for AAOI’s Q2

Applied Optoelectronics’ second-quarter 2026 results are expected to have benefited from accelerating demand for optical transceivers used in AI-focused data centers. The company anticipated sequential growth in data center revenues, supported by continued strength in 400G products and a sharp ramp in 800G shipments. AAOI expected to ship nearly four times the number of 800G units delivered in the first quarter, when 800G revenues totaled $4.6 million. Initial shipments against new hyperscaler volume orders were also scheduled to begin during the quarter.

The CATV business is also likely to have supported second-quarter growth. AAOI projected CATV revenues between $75 million and $80 million, up from $66.8 million in the first quarter, reflecting robust demand for 1.8-GHz amplifiers from its largest customer and growing contributions from newer multiple-system operator customers. Continued cable-network upgrades and early revenues from the company’s software solutions may have provided additional support.

Manufacturing expansion is expected to have enabled higher production during the to-be-reported quarter. AAOI planned to increase monthly 800G and 1.6T capacity from roughly 100,000 units exiting the first quarter to approximately 150,000 units during the second quarter. The company’s vertically integrated model, automated production lines and in-house indium-phosphide laser manufacturing likely helped improve supply availability and supported the ramp in next-generation transceivers.

However, production capacity and manufacturing lead times are likely to have remained the primary constraints. Gross-margin expansion could also have been limited by an unfavorable near-term data center product mix and costs associated with ramping 800G and 1.6T production. AAOI guided for a non-GAAP gross margin of 29-30% compared with 29.2% in the first quarter, as the company continued to fine-tune manufacturing processes and improve yields. Elevated operating expenses, tariffs and customer-warrant-related contra-revenue could have further restricted profitability.

Applied Optoelectronics faces stiff competition from Lumentum LITE, Ciena CIEN and Coherent COHR in the optical networking market, which is expected to have hurt top-line growth in the to-be-reported quarter. Ciena is challenging AAOI by expanding beyond optical systems into high-speed interconnect modules and pluggable transceivers. Coherent competes directly in 800G and 1.6T transceivers while possessing substantial in-house indium-phosphide manufacturing capabilities. Lumentum is challenging AAOI through its leadership in EML and continuous-wave lasers, which are critical components in 800G and 1.6T transceivers.

AAOI Shares Outperform Sector

AAOI shares have surged a whopping 216.2% year to date (YTD), outperforming the Zacks Computer & Technology sector’s growth of 11.7%. YTD, AAOI shares have outperformed peers, such as Lumentum, Ciena and Coherent, shares of which have returned 111.6%, 67.1% and 56.1%, respectively.

AAOI Stock’s Price Performance

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The Value Score of F suggests a stretched valuation for Applied Optoelectronics at this moment.

AAOI stock is trading at a premium with a forward 12-month price/sales of 5.28X compared with the Electronics-Semiconductors industry’s 5.13X and Coherent’s 5.56X, but lower than Ciena’s 7.4X and Lumentum’s 10.22X.

AAOI’s Current Valuation

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AAOI’s Prospects Ride on Strong Portfolio

AAOI’s long-term prospects are supported by sustained investments in AI infrastructure and increasing demand for higher-speed optical connectivity. The company is expanding its Texas and Taiwan operations, with plans to raise monthly 800G and 1.6T capacity to more than 650,000 units by the end of 2026 and more than 930,000 units by the end of 2027. The ability to manufacture multiple product generations on common automated lines should provide flexibility as customers transition from 400G to 800G and 1.6T.

In-house laser manufacturing represents another important competitive advantage. AAOI plans to expand laser fabrication capacity by roughly 350% by the end of 2027, positioning it to address industry shortages in indium-phosphide lasers. Longer term, co-packaged optics and external light-source modules could create an additional growth opportunity, with the company targeting ELSFP production capacity of approximately 400,000 units per month by the end of 2027. CATV amplifier demand, new MSO customers and the Quantum Link software suite provide further revenue diversification.

Conclusion

Applied Optoelectronics appears well positioned to deliver strong year-over-year growth in the second quarter of 2026, supported by accelerating AI-driven demand for 800G optical transceivers, a recovering CATV business and ongoing manufacturing expansion. While AAOI’s long-term growth prospects are strengthened by its vertically integrated manufacturing model, expanding capacity and exposure to AI infrastructure, its outstretched valuation suggests that much of the optimism may already be reflected in the stock, making the upcoming earnings report and management’s outlook critical for sustaining investor confidence.

Applied Optoelectronics currently has a Zacks Rank #3 (Hold), which implies that investors should wait for a more favorable point to start accumulating the stock. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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