AAOI Stock at $69: The $160 Target Before Earnings

AAOI stock at $69 vs a $160 analyst target

0:00 AAOI closed at just over $69 a share on Friday. And the five Wall Street analysts who have published price targets on it average $160, more than double. But four of those five targets were set back in August when the stock was well above $100. And the company reports earnings on November 5th. If you're bullish, that's an AI supplier about 70% below its May high. If you're skeptical, a stock that fell 70% can fall again. Either way, November 5th matters.

0:24 Here's the simplest way to picture it.

The taco truck analogy

0:26 AAOI is a taco truck parked outside a stadium on game day, and the line wraps around the block. My name is Blake. I dig up stocks before the bull stampede, so you're not buying at the top like Wojak. And today on 95 I'm investing, we're breaking down AAOI before November 5th, and what decides whether $160 still makes sense. So what are the tacos in this analogy?

What AAOI sells: optical transceivers for AI data centers

0:46 The stadium is an AI data center, and the tacos are little plugs called optical transceivers, which basically just means they turn electrical signals into light. So huge clusters of AI chips can talk to each other through fiber optic cable. The good news is the line is real, because in August the company said it expects demand to keep outpacing its production capacity through mid-2027. Right now, the problem that we're facing, and it's a good problem, is that we just don't have enough capacity even for the demand that we see for our own devices.

1:13 So Said another way, they can't make tacos fast enough. But a long line doesn't automatically make a great stock, because this truck is paying for new trucks by selling slices of the business. And basically 10 customers buy almost everything it makes. So how did this stock go from Wall Street darling to down 70% in about five months?

How AAOI stock fell 70% from its May high

1:31 Well, first it went up a lot. AAOI started 2026 under $40 a share, and by the middle of May it was up about six times after landing its first volume order for its newest 1.6T transceivers, worth over 200 million. So naturally, that's right about when Wojak heard about it at the barber shop and bought in at the very top. But then the round trip started. In August, the company guided its next quarter's earnings below what Wall Street expected and pushed its 1.6T rollout later because of a shortage of a key chip.

1:58 So, to pay for all those new trucks in late August, it announced a number $600 stock sale called an at-the-market offering, which basically just means it sells new shares straight into the market a little at a time. By October 5th, it had sold nearly 5.7 million new shares at an average of about $105. And that wasn't its first time because back in April and May, it had already raised over a billion dollars the same way. But, the bigger hit came from outside the company.

2:24 In mid-October, Broadcom CEO warned that funding constraints would slow the AI buildout. Optical stocks sold off across the board, and B. Riley cut its AAOI target from $109 to $92. So, when Alphabet reported last week that its AI spending pushed its free cash flow to about -9 billion for the quarter, investors got nervous about everyone selling to these giants, and on Friday, AAOI fell over 12% in 1 day. It fell because of someone else's cash flow.

2:49 Quick disclosure before the bull case, I own Amazon and Nvidia, and both show up in the story.

The bull case: 86% revenue growth

2:54 I don't own AAOI. So, positive Pete gets the mic first. The bull case here is genuinely strong. In the June quarter, AAOI's revenue grew 86% from a year earlier to about 192 million. And about 108 million of that came from data center products, which is the AI part of the business. The other big chunk, about 81 million, came from the cable TV equipment, which sounds boring until you realize it grew about 44% and gives this company a second engine that isn't tied to AI.

3:21 Even better, management guided cable TV revenue for this quarter to between 100 million and 110 million because cable companies are upgrading their networks. That engine is still speeding up. For the September quarter, management guided revenue to between 255 million and 290 million, which at the midpoint would be over 40% more than June in just one quarter. That's a lot of tacos. Wow.

1.6T transceivers and the $2 billion forecast

3:50 So, the next menu item matters even more. It's 1.6T transceivers move twice as much data as the 800G ones selling now, and they already have over 200 million in orders, and management expects more than 70 million of 1.6T revenue in the December quarter. On the May earnings call the CEO even talked about more than 2 billion of 1.60 sales next year. To be fair, that's a forecast, not a purchase order.

Building in Sugar Land, Texas

4:12 To make all of that AAOI is building like crazy right here in Texas. It's based in Sugar Land just outside Houston and the state shipped in about 21 million dollars in April to help it expand there. We have 1.6 million square feet of manufacturing space here in Houston. A year ago at this time we had about 65,000 square feet. So clearly all of that manufacturing space has not been built out. Management says its capacity for its fastest transceiver should more than triple by the end of this year.

4:37 That's the whole point of the new trucks.

Amazon's AAOI warrant

4:41 Here's where it gets interesting. Back in March of 2025 AAOI gave Amazon a warrant for almost 8 million shares at about $24 each and it vests as Amazon buys up to 4 billion dollars of AAOI's products. A warrant basically just means the right to buy stock at a fixed price later. So with the stock near $69 Amazon earns cheap AAOI stock just for being a good customer. Meanwhile Wojak paid full price at the top. That's a big vote of confidence from a giant customer and it's also a reminder of who has the leverage in this relationship.

5:09 I mean if you think about it, that's really pretty insane. Amazon is basically getting paid to be their customer.

Is AAOI stock cheap at 15x earnings?

5:22 So is the stock actually cheap? Analysts expect on average about 2.7 billion of revenue next year and adjusted earnings of about $4.60 a share. So at $69 you're paying about 15 times next year's estimated earnings if those estimates hold. For an AI supplier growing this fast, that is not expensive. That's why the bulls think $160 isn't crazy. But now Negative Nelly gets her turn and she brought the full earnings release.

The bear case: GAAP loss vs adjusted profit

5:43 Her first problem is the word profit. In the same quarter their revenue grew 86% AAOI reported a net loss of over 22 million under standard accounting rules called GAAP and adjusted profit of about five and a half million. As a former auditor here's a simpler version. Adjusted profit is kind of like telling your wife the vacation only cost the hotel because the flights, the rental car and the souvenirs were one-time items. Adjust the numbers aren't evil, and they can help you see the trend.

6:09 But, the real bill still came due, and the gap between those two numbers was about 28 million in a single quarter. But, growing sales will only help if you're able to keep enough of each dollar.

Gross margin below target

6:18 Under GAAP accounting, AAOI kept about 28 cents of every sales dollar after the direct cost of making the product. And even its adjusted gross margin 29.8% was lower than a year earlier. That matters because in May, the CEO said he expects gross margin to hit 35% by the end of this year. But, in August, management pushed that goal back by one to two quarters and guided this quarter roughly flat.

Dilution: $1.5 billion of new stock

6:40 But, the part that hurts existing shareholders the most is dilution. That basically just means your piece of the pie shrinks every time the company prints new shares. Between the spring and the sale that wrapped up in October, AAOI raised well over 1.5 billion dollars selling new stock on top of convertible notes it already had. So, even if the truck doubles its sales, your piece keeps getting smaller. That's because the cash is going straight into the truck.

7:02 In the June quarter alone, AAOI spent about 566 million on capital investments, including 280 million of prepayments for equipment, and its inventory climbed to about 279 million.

10 customers, 99% of revenue

7:13 But, Nelli's scariest point is the line itself. AAOI's top 10 customers made up 99% of its revenue last quarter, and its data center business sells to hyperscalers, the giant cloud companies with Amazon being the one we all know about. So, if one or two of them slow down their spending, there's no crowd of small customers to fill the gap. That whole line is basically 10 people. But, the line can also walk to another truck.

Competition and the proposed FCC ban

7:33 AAOI competes with much bigger optics makers like Coherent and Lumentum. Plus, Chinese makers like InnoLight, and a proposed FCC ban on Chinese-made transceivers could help a Texas manufacturer. But, proposed is the keyword. So, that brings us back to the 160.

Are the $160 targets stale?

7:48 Most of those targets were set in August, and the only target update since the crash was a cut. Now, funny enough, price targets tend to chase the stock price. So, if November 5th disappoints, don't be surprised if that $160 average drops fast, even if the business didn't change overnight. It's also worth knowing how the last two reports went. In May, revenue came in at about $151 million, near the bottom of the company's own range. And in August, the stock slipped even after beating estimates because the outlook came in light.

8:14 So, a beat alone has not been enough. AAOI reports after the market closes on Thursday, November 5th. Here is what I'd actually watch.

What to watch on November 5

8:21 Number one is revenue against that $255 to $290 million range. And even more, the guidance for the December quarter because that's where the 1.6 T ramp and the new Texas capacity should start showing up. Number two is gross margin. If it's climbing towards the CEO's target, the bull case gets a lot more believable. But if it's stuck near 29% while revenue explodes, Nelli wins that round. But the one I watch the hardest is cash and share count because if they announce yet another stock sale, that tells you the truck still costs more than the tacos are bringing in.

8:50 So, is AAOI a buy at $69?

Is AAOI a buy at $69?

8:55 Here is how I would think about it. If you believe the AI build-out keeps going, I do, this is a fast-growing supplier at about 15 times next year's estimated earnings. And buying a small position in pieces, some before the report and some after, lets you see whether the new trucks actually open. But if you can't stomach a stock that drops 12% in a day because of somebody else's cash flow, the $106 target is not your reason to buy. And waiting for the numbers just means you might pay a different price in either direction.

9:19 The line around this taco truck is real. What November 5th tells you is whether the owner can beat it without selling off the truck. Would you buy AAOI before November 5th or wait for the numbers? Let me know below in the comments. YouTube picked this next one for you. And unlike those targets, it's not from August.