AAOI's High-Stakes Role in the AI Infrastructure Boom

AAOI showed up in my radar in a technical screen end of day on Wednesday June 18. Strong bull bar breaking the trading range in previous month. The setup was high probability, with wedge reversal (shown in blue lines) from mid May to early June combined with a double bottom (shown in purple lines) formed in the first half of June.

On Friday June 20 (June 19 market did not open), we had great follow up, another strong trend bar closing at the high. Monday June 23 was a successful retest of the May 13 high, reaffirming the strong bull rally.

Today, AAOI reached its 2R target from the trading range breakout, which also happened to be the 50% retracement line of the large down trend from January to May, triggering lots of profit taking from short term traders. However, bulls defended the price to close above last week's high, and closed today's bar just 2 cents short of the daily range mid point. The probability still favours a long trade, with no obvious bear setup showing yet.

So, what is AAOI?

Applied Optoelectronics, Inc. (AAOI) is distinguished by its vertically integrated business model in the fiber-optic networking products industry, servicing optical transceivers for data centers and telecoms. AAOI directly benefits from the AI and Machine Learning grand scheme, as well as the 5G expansion. It produces their lazer chips, the core to their optical products, exclusively in Texas. On top of that, AAOI plans to expand Texas facility as part of a strategic shift to increase US-based manufacturing, which makes them a reliable supplier under Trump administration's calling for Made in America.

The Game-Changing Catalysts: A Tale of Two Hyperscalers

Two recent events have fundamentally altered AAOI's trajectory, validating its technology at the industry's highest level:

A Decade-Lo Alliangnce with Amazon: In March 2025, AAOI announced a strategic agreement with Amazon, which includes a warrant for the tech giant to purchase shares tied to up to $4 billion in potential purchases over ten years. To put into perspectives, the company's market cap is only $1.6 billion as of today. This is far more than a simple supply order; it represents a deep, long-term alignment with the world's leading cloud provider, offering unprecedented revenue visibility.

Re-engagement with a Second Tech Giant: In June 2025, the company began volume shipments of high-speed transceivers to another major hyperscale customer it had "re-engaged". This event provides tangible proof that its technological comeback is real and its operational execution is underway, shifting the narrative from "potential" to "reality". 

The Differentiator: A Vertically Integrated Powerhouse

What sets AAOI apart from many of its larger competitors is its vertically integrated business model. The company designs and manufactures its own proprietary semiconductor lasers—the "heart" of all optical products—using highly specialized and capital-intensive processes.

This model, once a burden due to high fixed costs during demand slumps, has become a core competitive advantage. In an environment where AI clusters require high-performance, cost-effective 800G optical modules, direct control over the most critical component offers potential advantages in:

• Performance and Customization 
• Cost Structure
• Supply Chain Control

This high operating leverage means that as high-volume orders from hyperscalers ramp up, incremental revenue can translate into rapid profit growth. The entire bull thesis hinges on feeding this high-fixed-cost machine with sustained, large-scale demand. 

Riding the AI Tailwind 

AAOI is a direct beneficiary of the data center construction boom driven by AI and machine learning. This isn't just an incremental upgrade; it's a structural shift in network architecture. AI training requires massive "east-west" traffic—data moving between thousands of servers within a data center—which in turn demands a network of extreme speed and low latency. 
 
This is the core application for the 400G and 800G optical transceivers that AAOI is now shipping in volume. The company is not just selling a component; it's providing an essential enabling technology for the AI revolution. It's always a good sign, when a high-tech production company is expanding capacity as it tries to meet the hyping demand.

According to Dr. Thompson Lin, the Founder, CEO, and Chairman of the campany, AAOI expects to acheive supplying 30-40% of Amazon's opical transceiver demands by mid 2026, with a personal belief of 90% in the future.  

Some Risks Considered

Execution: Scaling up complex manufacturing, particularly in the U.S., to meet the exacting quality and volume demands of hyperscale customers is a monumental task.

Concentration: AAOI's revenue are exclusively in optical transeceivers, but many great tech companies nowaday are single product companies.

Financial Fragility: The company's balance sheet has limited tolerance for error after a history of net losses and cash burn. However, the situation greatly improves with the new catalysts and the growing prospect. 

The Takeaway

AAOI is a great example of how technical analysis enables the fundamental research, leading to a position established with confidence. The Amazon deal was made public in March, where the company had an one day big 40% up, then eliminated and made new low in April. Whoever chased and bought in March got stuck in a losing position for 3 months before they see any profit, and this is assuming the trader didn't have their stop loss triggered, which is unlikely as price penetrated March low.