Raymond James sees major upside for Applied Optoelectronics

Investing.com -- Shares of Applied Optoelectronics (NASDAQ: AAOI) could have further room to run despite a more than 1,000% gain over the past year, according to Raymond James analyst Simon Leopold, who reiterated an Outperform rating and $160 price target following investor meetings with Chief Financial Officer Stefan Murry.

"We reiterate our Outperform rating on Applied Optoelectronics after hosting its Chief Financial Officer Stefan Murry for investor meetings," Leopold said. "Although shares exhibit shorter-term volatility, the stock has appreciated over 1,000% over the past year reflecting the incredible market demand and company’s significant expansion."

The analyst believes Wall Street estimates may still be underappreciating the company’s long-term earnings potential, particularly as Applied Optoelectronics ramps production capacity to meet surging demand for optical transceivers used in AI infrastructure.

"Supply, not demand, is the challenge," Leopold wrote, noting that the optical transceiver market remains constrained and customers are purchasing whatever supply is available. Management has outlined plans to increase monthly production capacity to more than $450 million by mid-2027, with a portion of the expansion expected to come online after tooling arrives in Texas in July.

According to Raymond James, the company’s targeted production capacity would imply annual revenue of roughly $6 billion. By comparison, Leopold’s annualized estimate for the second half of 2027 is approximately $3 billion, while the highest estimate currently on Wall Street stands at $4.2 billion.

"We estimate that annualized EPS could be $11.00-$12.00 at the 2H27 capacity level," Leopold said. "We characterize this as a realistic bull case."

The firm also sees potential for Applied Optoelectronics to gain market share from Chinese competitors, particularly Innolight and Eoptolink, as geopolitical considerations increasingly influence purchasing decisions among hyperscale data center operators.

"AOI believes it can gain meaningful market share and thinks it will largely come from Chinese competitors, Innolight and Eoptolink," Leopold noted.

National security concerns could further benefit the company. Most of Applied Optoelectronics’ planned capacity additions are located in Texas, while Chinese optical supplier Innolight was recently added to the U.S. Department of Defense’s 1260H list.

"Optics may be the next ’rare earth,’" Leopold said, highlighting the strategic importance of optical components in AI infrastructure and the potential risks associated with concentrated supply chains.

Raymond James also identified co-packaged optics (CPO) as a potential upside catalyst. While previous assumptions focused primarily on high-powered laser sales, management believes opportunities extend to optical modules, which could command significantly higher average selling prices.

The analyst added that opportunities may extend beyond NVIDIA to other AI infrastructure players, including AMD and Amazon, with Applied Optoelectronics potentially positioning itself as a supplier for emerging optical networking architectures.

"Our recent Silicon Valley tour led us to recognize opportunities extending beyond NVIDIA with AMD and Amazon," Leopold wrote.

Raymond James maintained its Outperform rating and $160 price target on the stock.

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