Applied Optoelectronics, Inc. (AAOI): A Bull Case Theory

We came across a bullish thesis on Applied Optoelectronics, Inc. on Value Degen’s Substack’s Substack by Unemployed Value Degen. In this article, we will summarize the bulls’ thesis on AAOI. Applied Optoelectronics, Inc.'s share was trading at $26.02 as of December 2nd. AAOI’s forward P/E was 84.03 according to Yahoo Finance.

Applied Optoelectronics, Inc. designs, manufactures, and sells fiber-optic networking products in the United States, Taiwan, and China. AAOI has faced significant near-term pressure following a challenging earnings report, though a partial rebound occurred as analysts examined the underlying business. The company is experiencing rapid growth in its data center segment, with quarterly revenue reaching $118.6 million, up 81% year over year, and guidance for Q4 revenue between $125 million and $140 million.

AAOI is expanding capacity through equity issuance rather than debt, and investing heavily in R&D, which depresses current profitability but acts as a forward-looking subsidy for innovation compared with traditional capex-funded expansion. The company expects the final qualification of its 800G data center transceivers to be completed next quarter, with initial shipments beginning shortly thereafter.

While equity dilution currently outpaces revenue growth, reducing revenue per share, projections suggest that this phase will conclude by 2027, when capex for data center buildouts begins to moderate. Current plans call for 7.5GW of new capacity to start construction in 2025, rising to 10GW annually through at least 2030.

Management guidance implies that 2026 could approach breakeven, and once equity issuance concludes, accelerating demand for replacement transceivers—driven by both conservative operators replacing components every three years and aggressive operators every five years—should drive strong future growth.

The primary risk remains historical quality issues, as seen a decade ago when hyperscalers dropped AAOI as a qualified vendor. Investor confidence is partially supported by continued insider buying from the founder and CEO. While near-term stock performance may remain range-bound, the long-term outlook is favorable, with profitability expected to accelerate as data center capacity expands, equity issuance ends, and recurring replacement demand grows, creating a compelling multi-year growth opportunity.

Previously we covered a bullish thesis on Fabrinet (FN) by Industrial Tech Stock Analyst in April 2025, which highlighted the Amazon warrant issuance signaling long-term customer alignment and diversification beyond Nvidia. The company's stock price appreciated approximately by 121.89% since our coverage. This thesis still stands as hyperscaler demand grows. Unemployed Value Degen shares a similar perspective but emphasizes AAOI’s rapid data center growth, equity-funded expansion, and recurring transceiver demand.

Applied Optoelectronics, Inc. is not on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 15 hedge fund portfolios held AAOI at the end of the second quarter which was 16 in the previous quarter. While we acknowledge the potential of AAOI as an investment, we believe certain AI stocks offer greater upside potential and carry less downside risk. If you're looking for an extremely undervalued AI stock that also stands to benefit significantly from Trump-era tariffs and the onshoring trend, see our free report on the best short-term AI stock.

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Disclosure: None.