Applied Optoelectronics (NASDAQ:AAOI) experienced a significant premarket rally on Friday, with shares climbing 14% to $141.66 as of 6:45 a.m. EDT. The surge follows the company's announcement of record second-quarter revenue and robust guidance for the third quarter, driven by increased production of high-speed optical products.
Record Q2 Performance
The company reported preliminary, unaudited revenue of $191.9 million for the second quarter of 2026, representing an 86.4% year-over-year increase and a 27% sequential jump. This record figure was underpinned by strong demand in both data center and CATV segments. Data center revenue reached $107.7 million, up 140.4% year-over-year, while CATV revenue grew 43.8% to $80.6 million.
Non-GAAP gross margin came in at 29.8%, up 0.6 percentage points sequentially but down 0.6 points from the year-ago period. The company returned to profitability on a non-GAAP basis, posting earnings per share of $0.06, compared to a loss of $0.07 in the previous quarter. However, on a GAAP basis, the net loss widened to $22.8 million from $14.3 million in Q1.
Q3 Outlook: Capacity Expansion Ahead
Management guided third-quarter revenue to a range of $255 million to $290 million, with a midpoint of $272.5 million, implying a 42% sequential increase. The midpoint for non-GAAP gross margin is 29.75%, essentially flat compared to Q2. Non-GAAP EPS is expected to be between $0.11 and $0.26, with a midpoint of $0.185.
CEO Thompson Lin highlighted that demand is expected to "continue to outpace our production capacity through mid-2027." The company reported a sequential doubling in 800G volume and aims to increase monthly capacity from approximately 200,000 units to 650,000 units of 800G and 1.6T products by year-end, a 225% increase.
Market Reaction and Analyst Sentiment
The premarket surge reflects investor optimism about the resolution of factory bottlenecks and the company's ability to scale production. However, some analysts remain cautious. The consensus Q3 EPS estimate stands at $0.25, down from $0.28 a month ago, and sits at the upper end of management's guidance range. While the stock trades at $141.66, it is still 16% below the average analyst price target of $164.58, though the target range is wide ($57.50–$220).
The stock has gained 31.7% over the past five sessions, partly boosted by a report that Washington is preparing restrictions on Chinese optical transceiver imports. Such a policy could benefit domestic manufacturers like Applied Optoelectronics, as well as peers Coherent (NYSE:COHR) and Lumentum (NASDAQ:LITE), which also saw gains.
Balance Sheet and Investment
The company's balance sheet reflects heavy investment in capacity. Cash and equivalents increased 136% since December, while net plant and equipment rose 85% and inventory grew 52%. These investments are aimed at meeting the surging demand for AI-driven optical connectivity.
Risks and Watch Items
Despite the positive momentum, several risks remain. The flat margin outlook, ongoing negative adjusted EBITDA, and increasing share dilution (diluted share count expected to rise 5.3% in Q3) could limit upside. Additionally, the proposed U.S. import policy is not yet finalized, and potential supply constraints on indium-phosphide could affect broader optics scaling.
Investors will closely monitor estimate revisions and factory ramp progress in the coming weeks. The next major investor event is the Rosenblatt summit on August 18, which may provide further clarity on capacity and margin trends.
