AAOI is a great business, trading at a price that is beyond reality. Waiting for a short but not just yet.

AAOI has been a standout name in the AI optics trade, let's start with the good. Q2 was excellent, record revenue of $191m, up 86% yoy and 27% sequentially, back to non GAAP profitability at $0.06 vs a $0.01 consensus, fifth straight record quarter. The Q3 guide is $255-290m, roughly 130% yoy and a 42% sequential jump and management says growth is capped by production capacity, not demand. As a US based, high volume transceiver supplier into hyperscaler buildouts, the demand signal doesn't get any cleaner.

Results are great but the problem is entirely the price, a few things to note,

Stock is up 900% over the past year and only barely GAAP profitable, on 30% gross margins. You're paying a hyperscale winner multiple for a thin margin hardware business. The growth is being funded with dilution, roughly $538.8m raised via equity offerings, not bearish entirely but raises concerns for shareholders, share count is climbing while you pay up. The peer group LITE and COHR trade north of 127x trailing earnings, the whole complex is priced for a perfect, uninterrupted AI capex cycle. A meaningful slice of the recent move is a policy premium from a reported draft US ban on Chinese optical modules, a rule that doesn't exist yet and could be softened or shelved.

So the setup looks like a short and is but here's why I'm not short just yet. The stock carries a beta of 3.76 and is pricing roughly a 17% move around earnings. That means implied vol is jacked, puts are expensive, and the squeeze risk is very real. Shorting a high momentum name into peak IV is how bears get carried out.

My plan is to wait and let IV compress after the earnings/policy catalysts clear, watch for a failed rally rather than pre positioning into a raised guide, and use a bear spread incase a squeeze occurs and it can't blow me up.

For those who trade extended names do you prefer to wait for vol to cool and short a rich name or is the squeeze/borrow risk on names like this just never worth it versus rotating into a cheaper peer? Also, where does everyone put fair value on AAOI?