Zacks Rank #3 (Hold) stock Applied Optoelectronics (AAOI) designs and manufactures fiber-optic networking products for internet data centers, cable television, telecommunications, and fiber-to-the-home end markets. The company is vertically integrated, beginning with lasers and laser components and building up to optical modules and complete equipment. The company manufactures most of the laser chips and optical components used in its own products.
The AI Scaling Bottleneck
AAOI’s hottest business segment is the AI data center market. Big tech companies looking to gain a foothold in the AI market are building data centers in one of the biggest commercial buildouts in history to train complex AI models. These massive data centers are filled with thousands of NVIDIA (NVDA) graphics processing units (GPUS). Traditionally, GPUs are connected using copper. However, traditional copper interconnects hit physical limits regarding reach, power consumption, and thermal output. Additionally, copper prices have increased dramatically over the past year, making optics more attractive for these uses.
As a result, AAOI’s top-and-bottom line growth is currently in the high double-digit range. However, Zacks Consensus Analyst Estimates suggest that AAOI’s EPS and revenue growth will grow to triple-digits in 2026 and 2027.
Image Source: Zacks Investment Research
Amazon Deal Provides Revenue Visibility
Last year, Applied Optoelectronics announced a massive, multi-year deal with Amazon (AMZN). Amazon will invest up to 8 million shares in AAOI in exchange for an advanced supply of optical transceivers and data center networking products. The deal provides AAOI with multi-year revenue visibility and validation from one of the leading hyperscalers.
Growing Profit Margins
The company’s profit margins have been increasing dramatically and have nearly doubled since 2023.
Image Source: Zacks Investment Research
Geopolitically Insulated
AAOI stands to benefit as Western nations seek to derisk their supply chains from China-based optical suppliers. The company’s primary manufacturing facility is in Texas, which makes it one of the few domestic optics manufacturers.
AAOI Technical Analysis
AAOI shares retook the 50-day moving average and are breaking out of a picture-perfect bull flag pattern.
Image Source: TradingView
Bottom Line
As traditional copper infrastructure gives way to high-speed optical transceivers, AAOI’s vertical integration, expanding profit margins, and multi-year deals position it to capitalize on the AI boom.
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