Full Comment:

"After the close on March 23, AAOI announced that a Hyper scale customer, who we believe to be Oracle, placed a $53mn 800G transceiver order. This is the same customer that recently placed a $200+mn 1.6T order. The new 800G order is expected to begin shipping in 2Q26 and to be completely shipped by mid-3Q26. Like with the recent 1.6T order, the customer is ordering a little ahead of final product qualification, which remains in progress. AAOI management says this initial 800G volume order from this customer is expected to be the first of more to come as it scales for rollouts across its clusters and regions. Last week, at OFC, AAOI laid out a new capacity expansion plan with higher-than-previous volumes later this year and next for 400G, 800G, and 1.6T, and that also now includes production plans for ELSFP (external light source fully pluggable) modules for CPO applications. The company expects to be able to produce ~1.4mn total units per quarter exiting 2Q26 growing to ~5.6mn units per quarter exiting 2027. The table in this note has our estimate of the total AAOI Datacom revenue potential by quarter from 1Q26 through 4Q27, broken down by product (400G, AOC, 800G, 1.6T, ELS) and includes ASP assumptions. This analysis suggests AAOI's Data Center revenue potential, excluding ~$300mn per year in CTV sales, is greater than $2bn in 2026 and $6+bn in 2027. That said, we are modeling only $1bn in 2026 revenues and $3.3bn for 2027. This is because for capacity to turn into revenues AAOI needs product qualifications, customer orders, and time to build and ship product once these things are in. Therefore, we expect there to be a gap between product capacity and revenues in 2026 and 2027 that should close over time as the company scales operations. There is also likely another $600mn to $1bn in capex needed to achieve the full capacity potential by the end of next year, in our view. Within this context, we see relatively large orders, like this one from Oracle, as positive and necessary to unlock the full potential of AAOI shares. We are reiterating our Buy rating and $140 price target based on 22.5x our CY27 EPS estimate."