Applied Optoelectronics Inc. (NASDAQ:AAOI) stock surged in premarket trading Friday after the company reported second-quarter results that topped Wall Street estimates, issued strong third-quarter guidance and said demand for its AI networking products is expected to outpace production capacity through mid-2027.
During the earnings call, management said Applied Optoelectronics could generate even more revenue if it had enough manufacturing capacity to meet customer demand.
Executives said demand for AI networking products remains so strong that near-term sales are “bounded almost entirely by production capacity and key component availability,” adding that forecast demand is expected to exceed production capacity through mid-2027.
The company also reiterated that its projected 2026 revenue of about $1.1 billion is constrained by supply and manufacturing capacity, not by market demand.
Earnings Snapshot
Applied Optoelectronics reported second-quarter revenue of $191.9 million, topping the analyst consensus estimate of $190.5 million, according to Benzinga Pro.
Revenue increased 86% year over year and 27% from the previous quarter. The result exceeded expectations and fell within the company’s guidance range of $180 million to $198 million.
The company posted its fifth consecutive quarter of record revenue, driven by continued strength in its data center and CATV businesses.
Adjusted earnings came in at 6 cents per share, beating analyst estimates of 1 cent per share.
Adjusted gross margin was 29.8%, compared with 30.4% a year earlier, in line with the company’s guidance of 29% to 30%.
Applied Optoelectronics ended the quarter with $508.8 million in cash, cash equivalents, short-term investments and restricted cash.
AI Demand Drives Data Center Growth
The company continued to benefit from robust AI infrastructure spending, particularly for its 800G and 1.6-terabit optical transceivers.
Data center revenue climbed to $107.7 million, accounting for 56% of total revenue. The segment grew 140.4% year over year and 32.3% sequentially.
Revenue from 800G products reached $12.8 million, representing 11.9% of data center sales. Sales increased more than tenfold from a year ago and more than doubled from the prior quarter.
Revenue from 400G products totaled $48.4 million, or 45% of data center revenue. Sales increased more than fourfold year over year and 27.4% sequentially.
Management expects 800G revenue to increase nearly fivefold sequentially in the third quarter. However, growth remains constrained by manufacturing capacity and component availability.
The company also expects one customer to account for more than 10% of third-quarter revenue, driven by shipments of 800G and 1.6-terabit optical products.
Management said customer demand for 800G and 1.6-terabit optical modules is expected to exceed production capacity through at least mid-2027.
Manufacturing Expansion Underway
To meet growing AI demand, Applied Optoelectronics is expanding production capacity.
Monthly manufacturing capacity is approaching 200,000 units, up from nearly 100,000 units at the end of the first quarter.
The company expects capacity to exceed 650,000 units per month by the end of 2026 and over 930,000 units per month by the end of 2027.
A new production facility will focus on 800G and 1.6-terabit transceivers, while additional facilities in Pearland and Houston are scheduled to begin operations in early 2027.
Management said the expansion is expected to make Applied Optoelectronics the largest U.S.-based manufacturer of AI-focused data center transceivers.
Outlook
Applied Optoelectronics expects third-quarter revenue of $255 million to $290 million, compared with the analyst consensus estimate of $278.3 million. At the midpoint, the guidance implies approximately 130% year-over-year growth.
The company forecast adjusted third-quarter earnings of 11 cents to 26 cents per share, compared with analyst estimates of 28 cents per share.
Management said it expects to remain profitable on a non-GAAP basis throughout 2026 as production capacity expands.
For the full year, Applied Optoelectronics expects revenue of about $1.1 billion, with growth constrained primarily by manufacturing expansion and component availability rather than customer demand.
AAOI Price Action: Applied Optoelectronics shares were up 11.43% at $138.41 during premarket trading on Friday, according to Benzinga Pro data.
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