Applied Optoelectronics Inc. (NASDAQ:AAOI) has had a rough few days. Shares fell about 14% on October 8, about 7% on October 12, and another 9% to 12% on October 14, to the high $80s. The selloff hit the whole optical group, starting with profit-taking after big gains, and deepened on warnings from Intel and Broadcom about AI funding constraints.
AAOI also completed a $600 million stock sale on October 5 at an average price of about $105 per share, so the stock now trades below the average sale price. The stock now trades more than 60% below its 52-week high of $233.67, though it’s still up sharply this year, no surprise for a stock that took the top spot in our Top 10 Co-Packaged Optics (CPO) Stocks to Buy in 2026 list. AAOI makes the parts that move data between servers in AI data centers. It also makes its own lasers, and I think that’s what investors should focus on as co-packaged optics (CPO) takes off. Applied Optoelectronics’ laser technology could matter as data centers move toward CPO, but it’s not the only high-flying stock worth watching. See all 12 picks.
Why AAOI’s Lasers Fit the CPO Shift
CPO systems need a separate, very powerful laser to supply light, and AAOI makes one. It first built the laser for self-driving car sensors and now offers a version for CPO. Several customers have already qualified it. But capacity is the constraint. AAOI must prioritize lasers for its own transceivers, so it can’t yet serve first-generation CPO deployments at scale and could lose early share to competitors. Meaningful volume is expected later in 2027 and into 2028. These lasers are also hard to make, running at several times the power of the lasers in today’s products. AAOI plans to make about 400,000 of its CPO light source modules a month by 2028.
What I find most compelling is the profit potential. Management expects lasers to earn gross margins of about 55% to 65%, and the CPO module above 50%, starting around the second half of 2027. That compares with a non-GAAP gross margin of 29.8% in the second quarter and the company’s 40% long-term target. So as CPO grows, AAOI could become a much more profitable business. Applied Optoelectronics’ path to higher margins depends on scaling CPO production, but it’s not the only AI stock with a potentially major growth catalyst. Discover 10 stocks to watch.
Earnings Are Expected to Catch Up With the Price
AAOI trades at a forward Price-to-sales ratio of 8.78x, nearly three times its 5-year average of 3.05x. That is a steep premium, but the EPS outlook helps justify it. Analysts expect earnings to skyrocket 577% in 2027 and nearly double again in 2028. The forward P/E is about 148x this year, inflated by the small profit amount. That multiple is expected to come down to 21x on 2027 earnings and about 11x by 2028. The balance sheet is also solid. AAOI held about $200 million more cash than debt as of June 30, and its recent $600 million stock sale added much more. That gives it room to build the capacity CPO will need.
Hedge fund ownership held steady, as funds holding AAOI slipped from 55 in Q1 to 54 in Q2. The value of their stakes fell from $871 million to $755 million.
The recent drop reflects nerves around AI spending and funding across the optical group, along with the share supply. But if CPO grows as expected and AAOI can add laser capacity in time, the recent selloff could present a buying opportunity.
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