Sell Memory, Buy Optical Communications? Micron Target Price Cut Sparks Sell-Off, AAOI Earnings Ignite AI Optical Interconnect Rally

U.S. stock markets witnessed a rare sector divergence last Friday (7th). Memory-related stocks broadly weakened, while the optical communications supply chain surged in the opposite direction. The stark performance gap sparked heated debate over a 'sell memory, buy optical communications' trading strategy across investor circles over the weekend.

The trigger was a new report from Citigroup analyst Atif Malik. Although Citigroup maintains a 'Buy' rating on Micron Technology (MU-US), it slashed its target price from $1,400 to $1,150.

Citigroup concluded, after cross-checking with upstream and downstream memory supply chain players, that DRAM and NAND price increases will gradually converge over the next four quarters and may peak by May next year.

The report further forecasts that DRAM price quarter-on-quarter growth will slow sequentially to 23%, 9%, 2%, and 0%, possibly turning into a 3% decline in H2 2027. NAND price growth is projected at 29%, 7%, 0%, and -1%, with potential declines widening to 5% in the second half.

Citigroup attributes this cooling trend to supply pressure from Chinese memory manufacturers ChangXin Memory (688825-CN) and Yangtze Memory, both of which continue to expand capacity.

Following the news, Micron's stock fell about 1%, and SanDisk (SNDKV-US) dropped over 2%. The decline spread to Asian markets: South Korea's SK Hynix (000660KS) plunged over 4%, while Samsung Electronics (005930KS) and Japan's Kioxia also declined.

In stark contrast to memory stocks, optical communications module maker AAOI (AOI-US) delivered strong earnings, triggering a broad rally in the optical communications sector.

AAOI's Q2 revenue surged 86% year-on-year to $191.9 million, with data center business revenue surpassing $100 million for the first time. Non-GAAP EPS was $0.06, exceeding the high end of financial guidance.

The company raised its outlook, projecting Q3 revenue between $255 million and $290 million, while maintaining its full-year target at approximately $1.1 billion.

The news energized the optical communications sector. Corning (GLW-US) rose 5%, Lumentum (LITE-US) gained 6%, and Coherent (COHR-US) surged 13%. AAOI itself jumped 9%.

From a product mix perspective, AAOI's Q2 400G product revenue reached $48.4 million, more than quadrupling year-on-year. More notably, 800G product revenue hit $12.8 million, growing over tenfold year-on-year and doubling quarter-on-quarter. Management forecasted that 800G revenue in Q3 would nearly quintuple from the previous quarter, indicating rapid market shift from older 100G and 400G standards to higher-speed products.

Signs of capacity constraints were also evident. AAOI management revealed that current customer order demand exceeds actual supply capacity by 20% to 40%. Thus, the constraint on company growth is no longer market demand but production bottlenecks.

Current monthly production capacity for 800G and 1.6T products is nearing 200,000 units. The company plans to expand this to over 650,000 units by end-2026 and exceed 930,000 units by end-2027.

AAOI CEO Lin Chih-Ming optimistically projected that 1.6T product revenue in Q4 could exceed $70 million, adding, 'I wouldn't be surprised if it doubles again in Q1 next year.'

However, he acknowledged that key components for 1.6T—DSP and TIA—remain severely constrained, and component supply, not internal capacity, will be the main bottleneck for Q4 shipments.

Market analysts believe AAOI's better-than-expected earnings have boosted confidence for Lumentum and Coherent, both of which are backed by NVIDIA (NVDA-US) and seen as key 'picks and shovels' players in the AI computing infrastructure wave.

What truly ignited weekend discussions was a post by Citrini Research analyst Jukan on X (formerly Twitter), a long-time bull on memory stocks.

He suggested investors might consider a 'sell memory, buy optical communications' strategy in the short term, citing three reasons:

- Recent malfunction in South Korea's leveraged ETF market mechanism may trigger redemption pressure, adding downside risk to memory stocks; - NVIDIA is adjusting its next-gen AI system architecture, with rumors that the new Rubin Ultra chip may reduce HBM (High Bandwidth Memory) per rack and instead rely on optical interconnects to link multiple racks; - Market expectations that memory prices will peak within the next two quarters are intensifying.

Notably, Jukan emphasized that his long-term outlook on memory stocks remains positive, with only a short-term shift toward caution.

He believes the focus of AI infrastructure investment is shifting from simply stacking HBM capacity to optimizing overall data center architecture efficiency, with high-speed optical interconnects being a key enabler of this transformation.

His comments were immediately countered by Serenity, an anonymous AI and semiconductor supply chain researcher and investor active on X, who reaffirmed his bullish stance on memory stocks.

Serenity's core argument: 'What changed is the stock price, not the fundamentals.'

He pointed out that Coherent and Lumentum's laser components had already sold out their two-year production capacity during July's stock plunge. AAOI's supply-demand imbalance was clearly disclosed in its prior earnings call. Thus, the fundamentals of these companies never deteriorated during July's decline—'only the stock price changed after liquidation selling pressure subsided.'

He sarcastically noted that many investors who called AAOI a 'scam' at $75 now turn bullish at $140, 'but the capacity bottlenecks for optical transceivers and indium phosphide substrates haven't changed—they may even be worse.'

Regarding memory stocks, Serenity observed heavy retail panic selling recently but questioned, 'Weren't these same people cheering Micron for signing 16 supply contracts and Samsung for record-high operating profit just a month ago?'

He argued that NVIDIA's storage configuration optimization for Rubin Ultra is just routine generational refinement, and current memory stock valuations are 'unreasonably low' relative to operating profit levels. With memory demand turning structurally higher, supply-demand imbalances next year could worsen.

Serenity concluded: 'AAOI at $140 and $75 is the same company; Samsung at $1.5 trillion and $980 billion market cap is still the same company. Only valuations and market narratives changed—and that's usually just noise. The market is simply rotating between sectors.'